1.       SIM cards, recharge coupon vouchers, mobile telephone rentals on post paid connections, value added services such as ring tones, music down loads, wall papers etc., and proceeds received on sharing of infrastructure cannot be subjected to tax either under Section 4(1) or Section 4(8) of the Act.


2.       Telephone instruments, mobile handsets, modems and Caller ID instruments are “goods” both under Article 366(12) of the Constitution of India and Section 2(16) of the Act.

3.       In case these goods are sold or supplied to the subscribers by the service providers such “sale” or the “transfer of the right to use these goods” would be liable to tax either under Section 4(1) or Section 4(8) of the Act.

4.       However, if, these goods are procured by the subscribers from suppliers, other than the service providers or their distributors/franchisees, the monthly charges, which the subscriber is called upon to pay by the service provider, would fall within “telecommunication service” and cannot be made liable to tax under the Act.

5.       If non-refundable deposits are collected, by the service providers from their distributors, as security deposit for supply of SIM cards, recharge voucher coupons and the like, such deposits would not fall within the ambit of “goods” and cannot be brought to tax under the provisions of the Act.

6.       If, on the other hand, the non-refundable deposit is received against supply of telephone instruments, batteries, accumulators etc., and it is established that the said deposit is a disguised form of consideration either for the sale or for the transfer of right to use such goods, then these deposits would form part of the sale consideration and be subject to tax under the provisions of the Act.

7.       Likewise, if refundable deposits are collected from post paid subscribers as security for payment of dues towards STD or ISTD facilities provided by the service provider, then such deposits, not being “goods”, cannot be brought to tax under the Act.

8.       If, however, the refundable deposits are for supply of telephone instrument, hand set etc., which are “goods” and it is established that the deposits are a disguised form of sale consideration, then these refundable deposits may also form part of the sale consideration under Section 2(29)(b) of the Act, and would be chargeable to tax under Section 4 thereof.
+TAX REVISION CASE Nos.53 of 2007; 80, 106, 181 AND 245 of 2008; WRIT PETITION Nos.18723, 19704, 19705, 20907 AND 28394 of 2007; 7869, 7873, 9464, 9829, 13741, 19138, 19139, 19140, 20931, 20989, 20990, 22387 AND 22861 of 2008; 718, 737, 1016, 2259, 2575, 2580, 2645, 3095, 3123, 3442, 4056, 7854, 10743, 11053, 16341, 16342, 16343, 16875, 17675, 18914 AND 29189  of 2009; 1526, 1578, 1579, 5710, 5721, 13555, 13556, 21494, 32471 AND 32829 of 2010; AND 2428, 2429 AND 2430 of 2011
%  Dated   08-09-2011

TAX REVISION CASE No.53 of 2007:

#    The State of Andhra Pradesh, rep., by the State representative before STAT D. No.5-4-404 to 408, Nampally, Andhra Pradesh, Hyderabad.

$   M/s. Bharat Sanchar Nigam Limited, Hyderabad.

! Counsel for the petitioner:   Sri A.V. Krishna koundinya, Learned Special Standing Counsel for Commercial Taxes

^ Counsel for respondent :   Sri R.S. Murthy

> HEAD NOTE:
? Citations:
[1] (2006) 3 SCC 1)
2 (2006) 1 ALD (Crl.) 96 (A.P)
3 1959 SCR 379
4 (2004) 5 SCC 632
5 (1989) 2 SCC 645
6 (2010) 35 VST 549 (SC)
7 Judgment in TRC Nos.154, 155, 156, 157, 160, 169, 170, 181, 205 and 243 of 2010     dated:28.1.2011
8 Judgment in W.P. No.17092 of 2010 & batch dated 23.02.2011
9 Judgment in Civil Appeal No.6319 of 2011 dated 4.8.2011
10 (2000) 137 STC 620
11 2001(4) SCC 593
12 (2010) 5 SCC 122
13 (2004) 4 SCC 751 (DB)
14 Judgment of APHC DB in W.P. No.23811 of 2009 dated:     11.02.2011
15 (2000) 6 SCC 12

THE HON’BLE SRI JUSTICE V.V.S.RAO

AND

THE HON’BLE SRI JUSTICE RAMESH RANGANATHAN

COMMON ORDER: (Per Hon’ble Sri Justice Ramesh Ranganathan)

Declaration of the law by the Supreme Court, in Bharat Sanchar Nigam Ltd v. Union of India[1], notwithstanding, we are now called upon, in this batch of Writ Petitions, to adjudicate on the jurisdiction of the revisional/appellate/assessing authorities to levy tax under Section 4(1) and (8) of the A.P. VAT Act, 2005 (hereinafter referred to as the Act) on SIM cards – pre-paid and post-paid; recharge coupons; value added services; telephone instruments, mobile handsets, modems and caller ID instruments; mobile telephone rentals; sharing of infrastructure; non-refundable deposits; refundable deposits etc.

T.R.C. Nos.53 of 2007  and batch are preferred by the State of Andhra Pradesh against the orders of the Sales Tax Appellate Tribunal, Hyderabad (hereinafter called “STAT”) holding that telephone instruments were merely end devices of the system; there was no material to show that rental charges were levied for use of handsets; and no finding could be given on the questions (1) whether handsets and telephone instruments were different goods or were one and the same; or (2) whether mobile cell phones alone could be called as hand sets.

It would suffice to note the facts in W.P. No.28394 of 2007 as representing the facts involved, and the questions which arise for consideration, in these batch of writ petitions.   The petitioner, a company incorporated under the Companies Act, 1956, provides telecommunication services to various subscribers all over the country.  They are registered dealers on the rolls of the Commercial Tax Officer, Begumpet. They are registered with the Assistant Commissioner, Begumpet Circle, for payment of service tax.  The 1^st respondent, by his order dated 07.12.2007, held that sale of, or transfer of the right to use, the aforementioned goods were chargeable to tax either under Section 4(1) or Section 4(8) of the Act.
Sri Sunil Gupta and Sri E.Manohar, Learned Senior Counsel; Sri Lakshmi Kumaran & Sridharan, Sri C.R. Sridharan, Sri R. Raghunandan, Sri S. Krishnamurthy, Sri Sheikh Jeelani Basha, Sri M.V.J.K. Kumar and Sri A.K. Jaiswal, Learned Counsel put forth their submissions on behalf of the petitioners-service providers and their distributors.  Sri A.V. Krishna koundinya, Learned Special Standing Counsel for Commercial Taxes, appeared on behalf of the State Government.  Sri A. Rajasekhar Reddy, Learned Special Standing Counsel, appeared on behalf of the Customs and Central Excise Department.  Written submissions were also submitted by M/s. Lakshmi Kumaran and Sridharan, Sri A.K. Jaiswal and Sri R.S. Murthy.

Before examining the rival contentions, on the validity of the revisional/appellate/assessment orders levying tax on different items supplied/provided by the service providers to their subscribers, it is necessary to understand how a cellular or a mobile telephone works. A large area, say a city, is divided into small cells and this enables two persons connected to a cell system to communicate with each other. That is why the term – “cell mobile phone” or “cell phone”.   A person using a phone in one cell of the division is plugged to a central transmitter which receives the signal and diverts it to the other phone to which the call/message is intended. When the person moves from one cell to another in the same city, or from one division to another, the Mobile Telephone Switching Office (MTSO) automatically transfers signals from one tower to another. All cell phone service providers have special codes dedicated to them which are intended to identify the phone’s owner and the service provider. System Identification Code (SID) is a unique 5-digit number that is assigned to each carrier by the licensor. Electronic Serial Number (ESN) is a unique 32-bit number programmed into the phone when it is manufactured. A Mobile Identification Number (MIN) is a 10-digit number derived from the cell phone number given to a subscriber. The SID, on the control channel, is a special frequency used by the phone and the base station.  Along with the SID the mobile handset also transmits a registration request and the MTSO, which keeps track of the phone’s location in a database, knows which cell phone is being used.  When the MTSO gets a call, intended for one cell phone, it looks up the database and diverts the call to that cell phone picking up the frequency pair used by the receiver cell phone.  When a cell phone is used the central antenna/central transmitter at the MTSO and the transmitters in other areas are co-ordinated with the cell phone in a fraction of a second. All this is made possible by a computer which simultaneously receives, analyses and distributes data by sending and receiving radio/electro-magnetic signals.  Every cell phone contains a circuit board which is its brain. It is a combination of several computer chips programmed to convert analog to digital and digital to analog, and translation of the outgoing and incoming signals. (Syed Asifuddin v. State of A.P[2]). The functioning of the mobile telecommunication system/network involves the following steps: i) the subscriber originates/generates/produces the voice by speaking through the handset; ii) this voice generated by the subscribers is transmitted on airwaves to the BTS; iii)  BTS then transmits the said voice to a modified ‘Flexent’ wireless platform on airwaves/cables; iv) The modified ‘Flexent’ in turn verifies and validates the authenticity of the subscriber and, upon such verification, transmits the said voice to the local exchange via BZ-SP on cables; v) the LE switches the voice of the subscriber to the Called Party which voice is again carried from LE  to modified ‘Flexent’ via BZ-SP to BTS to the Called Party’s handset/telephone instrument all on airwaves.

Let us now examine each of the transactions, which have been subjected to tax under the Act, item wise.

SIM CARDS:
It is contended on behalf of the petitioners – service providers that the use/utility  of the SIM card remains the same in both prepaid and postpaid connections; in the case of a pre-paid SIM card, service charge is collected mainly for  activating the connection; service tax is paid on this consideration as “telecommunication service”; a SIM card is incidental to the rendering of telecommunication service; SIM cards are not sold by the service provider to the subscribers, and are not chargeable to tax under Section 4(1) of the Act; even if it is held that SIM cards are “goods” and it is sold, the price charged for the Starter Kit does not constitute the sale consideration; sales tax is sought to be imposed even on the activation charges component of the value of a Starter Kit though it does not amount to “sale”; activation charges in the Starter Kit, pertaining to non-SIM/ROIM card based service (CDMA mobile instrument connection), is only a charge for service; post-paid SIM card charges, which represent the call charges collected by the petitioners from their subscribers, cannot be subjected to tax as there is no sale/deemed sale of goods; and, in any event, the purchase price of the SIM card in the hands of the petitioner, and a reasonable profit thereon, can alone be brought to tax under the Act.

On the other hand it is contended on behalf of the revenue that, while the SIM card enables access to the cellular network, it can also store data of phone calls, contact numbers, games, music etc; it is capable of being bought and sold; it has utility; it is capable of being transferred, delivered and stored; SIM cards have all the attributes of “goods”, and can be subjected to “sale”; pre-paid SIM cards are sold to customers, through distributors, for a price; the charges collected from the subscriber are for the SIM card; they are not collected for the service of activating the SIM card; SIM cards are not activated at the time of their sale to the distributors; and the amounts collected for issue of prepaid SIM cards, and rentals for postpaid SIM cards, represent the consideration for “sale” and “deemed sale” respectively.

It is essential, at the outset, to understand what a SIM card represents. A Subscriber Identification Module (SIM) card contains a computer chip with pre-recorded instructions. It is a device which helps the service provider identify the subscriber. It also enables the subscriber access the service provider’s network by means of electro-magnetic waves. The SIM card is merely a key to enter the service provider’s facility, and use their services. The process of activation involves information being fed into the computer maintained by the service provider, such as particulars of the amount charged, the identity of the subscriber, etc. In determining the issue as to what a SIM card represents, the following principles should be borne in mind. If the SIM card is not sold to the subscriber, but merely forms part of the services rendered by the service provider, it cannot be charged separately to sales tax. It is only if the parties intend that the SIM card should be a separate object of sale, can sales tax be levied thereon.  If the sale of a SIM card is incidental to the service being provided, and merely facilitates identification of the subscribers, their credit and other details, it would not be assessable to sales tax. (Bharat Sanchar Nigam Ltd.¹).

Section 4 of the Act relates to charge to tax and, under sub-section (1) thereof, every dealer shall be liable to pay tax on every sale of goods. Under Section 4(8) every VAT dealer who transfers the right to use goods taxable under the Act, for any purpose whatsoever, shall pay a tax for such goods.  Schedule IV of the Act lists “goods” taxable at 4%.  Listed under Entry 2 thereof are goods of tangible or incorporeal nature and include, under sub-entry (xi), SIM cards used in mobile phones.

Under the law relating to sale of goods there cannot be an agreement relating to one kind of property, and a sale as regards another. On a true interpretation of the expression “sale of goods” there must be an agreement between the parties for the sale of the very goods in which property eventually passes.  (The State of Madras v. Gannon Dunkerley & Co[3]). Even prior to the forty sixth amendment to the Constitution, it was possible for parties to enter into distinct and separate contracts, one for the transfer of goods and the other for remuneration for services. In such cases there are really two agreements, though there is a single instrument embodying them, and the power of the State to separate the agreement to sell, from the agreement to render service, and to impose sales tax thereon cannot be questioned. (Gannon Dunkerley & Co³). What are “goods” in a sales transaction remains, primarily, a matter of contract and intention. The seller and the 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.  (Bharat Sanchar Nigam Ltd.¹).  It is only if the parties to the agreement intend to sell and buy the “SIM” card for what it is, and not what it is intended for, can it be said that “SIM” cards are the “goods” which are the subject matter of sale.  If the intention of the parties, as envisaged in the agreement, is to buy and sell the SIM card per se, and not for activating the subscribers mobile telephone and thereby connect it to the service provider’s network, the SIM cards would constitute “goods” which are the subject matter of “sale”.
It would not suffice merely to hold that SIM cards are “goods” for the purpose of its being charged to tax under Section 4 of the Act.  It is only if the amount received represents the consideration for the sale of the SIM card, and not for the telecommunication services provided by the service provider after the subscribers mobile telephone is activated and connected to their network, would the sale of SIM cards be liable to tax under the Act.

In order to determine whether or not the amount collected for issuing a prepaid SIM card represents the consideration for the sale of the SIM card, it is necessary to understand the concept of “sale”.  Section 2(28) of the Act defines “sale” to mean every transfer of property in goods (whether as such goods or in any other form in pursuance of a contract or otherwise) by one person to another in the course of trade or business for cash, or for deferred payment, or for any other valuable consideration.  The classical concept of “sale” has three essential components 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 there is no “sale”. 

(Bharat Sanchar Nigam Ltd.¹; Gannon Dunkerley & Co.³).

The classical concept of sale, enunciated in Gannon Dunkerley & Co.³, has survived the Forty-sixth Constitutional Amendment in two respects. First with regards the definition of “sale” for the purposes of the Constitution in general, and for the purposes of Entry 54 of List II of the VII Schedule to the Constitution in particular, except to the extent that the clauses in Article 366(29-A) operate. Even after separate categories of “deemed sales” were introduced by the forty-sixth amendment to the Constitution, the meaning of the word “goods” was not altered. The composite elements of a sale, such as intention of the parties, goods, delivery, etc, continue to be defined according to known legal connotations.  The second is with reference to the dominant nature test to be applied to a composite transaction. Transactions which are mutant sales are limited to the clauses of Article 366(29-A). The sale element of those contracts, covered by the six sub-clauses of clause (29-A) of Article 366, are alone separable and can be subjected to sales tax by the States under Entry 54 of List II. The dominant nature test would not apply to such deemed sales. All other transactions would have to qualify as “sales”, within the meaning of the Sale of Goods Act, 1930, for the purpose of levy of sales tax.  (Bharat Sanchar Nigam Ltd.¹). For the tax to amount to a tax on the sale of goods, it must amount to a “sale” according to the established concept of “sale” in the Law of Contract or the Sale of Goods Act, 1930. The Legislature cannot enlarge the definition of “sale” so as to bring within the ambit of taxation transactions which cannot be a “sale”in law. (T.N. Kalyana Mandapam Association v. Union of India[4]).  If there is an instrument of contract which is composite in form, in any case other than the exceptions in Article 366(29-A), then, unless the transaction represents two distinct and separate contracts and is discernible as such, the States 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 for composite contracts, other than those mentioned in Article 366(29-A), continues to be: Did the parties have in mind or intend separate rights arising out of the sale of goods? If there is no such intention there is no “sale” even if the contract can be disintegrated. The test for deciding whether a contract falls into one category or the other is as to what is “the substance of the contract” or the “dominant nature test”.  (Bharat Sanchar Nigam Ltd.¹). Even if it were to be presumed that in the instrument of contract, which is composite in form, there are two distinct and separate contracts-one for sale, and the other for service rendered consequent to activating the cell phone and connecting it to the network of the service provider, and these two distinct and separate contracts are discernable as such, what can be subjected to tax is, at best, the contract of sale of the SIM cards, and not on the telecommunication services rendered by the service provider after the subscribers mobile telephone is activated.  While the Starter Pack contains both the SIM card and the literature relating to the manner in which it is to be used to activate the subscribers mobile phone, the price charged for the SIM card represents a fraction of the total amount charged for the Starter Pack, and a substantial portion thereof is for services rendered by the service provider for activating the subscriber’s mobile telephone, and for services provided consequent thereto. If the instrument of contract which is composite in form does not contain two separate agreements which are discernable as such, the dominant nature test would then apply and, as the dominant intention of supplying the Starter Kit is to activate the subscriber’s mobile phone and connect it to the service provider’s net work enabling the latter to render services, the incidental element of sale of the SIM card cannot result in the SIM card being charged to tax under the Act.

Under Explanation IV of Section 2(28) of the Act the transfer of the right to use any goods for any purpose shall be deemed to be a “sale”.  The Forty Sixth amendment to the Constitution introduced a fiction by which six instances of transactions were treated as “deemed sale of goods”. (Bharat Sanchar Nigam Ltd.¹). When the law creates a legal fiction, such fiction should be carried to its logical end. If the power to tax a sale, in an ordinary sense, is subject to certain conditions and restrictions imposed by the Constitution, the power to tax a transaction which is deemed to be a sale under Article 366(29-A) of the Constitution should also be subject to the same restrictions and conditions. (Builders’ Assn. of India v. Union of India[5]).  The said definition, as to deemed sales, will have to be read in every provision of the Constitution wherever the phrase “tax on sale or purchase of goods” occurs. (Bharat Sanchar Nigam Ltd.¹).  As the intention of the parties to the agreement in these batch of Writ Petitions, (i.e., the agreement between the service provider and the subscriber), is not to sell or buy a SIM card for what it is, but to use it to activate the subscribers mobile telephone and connect it to the service providers network, the SIM cards do not constitute “goods” and the amount collected for issuing a post paid SIM card does not represent the consideration for the transfer of the right to use the SIM card. The service, of activating the subscribers cellular phone, cannot be treated as “deemed sales” under Article 366(29-A)(d) of the Constitution of India or brought to tax under Section 4(8) of the Act.  While the States have the legislative competence to levy tax on sales if the necessary concomitant of a “sale” is present in the transaction, and the “sale” is distinctly discernible therein, they are not allowed to entrench upon the Union List and tax services by including the cost of such service in the value of “goods”. (Bharat Sanchar Nigam Ltd.¹; Association of Leasing and Financial Service Companies v. Union of India[6]; M/s. G.S. Lamba & Sons, represented by Mr. Gurusharan Singh Lamba v. State of Andhra Pradesh[7]; M/s. Viceroy Hotels Ltd v. The Commercial Tax Officer[8]).

It is wholly unnecessary for us to dwell any further on this issue in view of the judgment of the Supreme Court in IDEA Mobile Communication Ltd. v. C.C.E & C., Cochin[9].  The question which arose for consideration, in “IDEA Mobile⁹”, was whether the value of SIM cards, sold by the service provider to their mobile subscribers, should be included as “taxable service” under Section 65(105) zzzx of the Finance Act, 1994, (which provides for levy of service tax on telecommunication service), or whether it is taxable as “sale of goods” under the Sales Tax Act.  The Supreme Court held that the charges paid by subscribers, for procuring a SIM card, were generally processing charges for activating the cellular phone which would, necessarily, be included in the value of the SIM card; the amount received by the cellular telephone company from its subscribers, towards the SIM Card, forms part of the taxable value for the levy of service tax; SIM cards are never sold as goods independent of the services provided; they are considered part and parcel of the services provided; the dominant intention of the transaction is to provide services, and not to sell the material i.e., SIM Cards which, on its own but without the service, would hardly have any value; the value of the SIM card forms part of the activation charges as no activation is possible without a valid functioning of the SIM card; the value of the “taxable service” is calculated on the gross total amount received by the operator from the subscribers;  and no element of sale is involved in the transaction.

In view of the law laid down by the Supreme Court, in Idea Mobile Communication⁹, that the value of the SIM card forms part of the activation charges, service tax can alone be levied for such services, and not sales tax, the revisional/appellate/  assessing authorities have exceeded their jurisdiction in levying tax on pre-paid and post-paid SIM cards.

RECHARGE COUPONS/VOUCHERS:

It is urged on behalf of the petitioners-service providers that recharge coupons/vouchers are for extension of talk time/validity of the connection; they are also incidental and integral to telecommunication service; the recharge coupon does not, by itself, constitute “goods” and is not the subject matter of sale or purchase; the agreement between the subscriber and the service provider is for extension of talktime/validity period of the connection for extra consideration; this transaction itself is not sale of goods, but only a facet of “telecommunication service”; the recharge coupons are evidence of advance payment of consideration for receipt of services in the future;  the recharge coupons do not have utility or value of their own; the benefits arising out of a contract can never be  property; a recharge coupon is the benefit arising out of a contract and  cannot, therefore, be treated as property much less as “goods”; and it is merely a piece of instruction given by the service provider to the subscriber.

It is urged on behalf of the Revenue that Recharge coupons, unlike easy recharge coupons (i.e., Electronic voucher dispensation), are subjected to tax as they are “goods”; they have “value” irrespective of what they represent; they are tangible goods, and not merely a token of service; they are freely exchangeable; once purchased, they can be used by anyone having a cellular phone connection with the service provider; recharge coupons, like SIM cards, have the attributes of goods; they have the qualities of utility and are capable of being bought and possessed; electronic recharge does not involve physical goods and is different from physical recharge coupons;  recharge vouchers are transferred, from the service provider to distributors, as general merchandise; they are sold for a price and are kept as stock in trade; the terms and conditions of the agreement for appointment of distributors (called channel partners) reveal that recharge vouchers, by themselves, do not ensure a correlative service from the service providers unless the masked portion is scratched, and the PIN is punched to enter the telecommunication network;  only at that point of time is contact established between the petitioner and the service receiver; the channel partner does not secure any customer for himself while delivering the pre-paid vouchers;  the channel partner does not trade in “goods” or contract with his own customers, but receives the proceeds from the existing subscribers of the service providers for extending their talk time; the coupon is the medium employed by the service provider to reach the subscriber; a   subscriber follows the set of instructions on the coupon to secure access to the service provider’s network;  the recharge coupon is meant to be of economic utility only to the subscriber; and the sale value of recharge coupons, sold to distributors and subscribers in the State of A.P, has been taken as the basis for taxation.

Entry 47, as inserted to Schedule IV of the Act, by G.O.Ms. No.175, Rev. (CT-II), dated 18.02.2009 with retrospective effect from 18.11.2005, reads as under:

“Diaries, Calendars, annual reports, application forms, Stationary items like letterheads, visiting cards, bill books, leaflets, flyers, folders, soft bound books, centre pinned books, hard case books, computer stationery, posters, Brochures, CD/DVD Covers, visual aids, danglers, streamers, envelopes, labels, telephone, recharge coupons, report cards, Tickets, Cheque Books, Demand Drafts, Coupons and all kinds and classes of forms including tender and bid documents and similar printed materials.”

A recharge coupon is a memorandum on a small card or piece of paper containing certain digital arrangements or a number or a PIN.  It is merely an operational instruction given by the service provider to the subscriber to enable him to extend his talktime/validity of the connection period.  The purpose for which recharge coupons are issued is that the number printed on it is used to access the network of the service provider.  Except for this purpose and use, the recharge coupon has no other utility.  The subscriber, after purchasing the recharge coupon, scratches the silver/black panel to view an 18 digit secret code, then dials a particular number from his cell phone, and enters the 18 digit secret code.  This provides him access to the network of the service provider.  As soon as the secret code is entered through the cell phone, the recharge coupon slip becomes useless.  A recharge coupon is progressively being dispensed with, and the talktime/validity period of the connection is now being extended by Electronic Voucher Dispensation which is executed wholly electronically and telegraphically without the involvement of the card or slip of paper called the Recharge coupon. By mere delivery of the recharge coupon, the subscriber gets no right to use any “goods”.  The recharge coupon is only a means for accessing the service provider’s network, and does not constitute a separate sale of “goods”.  The intention of the parties, in the sale and purchase of recharge coupons, is merely to provide, and gain, access to the network of the service provider, and extend the talk time or the validity period of the connection.

As observed in relation to SIM cards, the expression “sale of goods” involves an agreement between the parties for the sale of the very goods in which the property eventually passes.  The parties to the agreement must be ad idem on the subject matter of the goods.  In these cases the agreement between the parties is not to buy and sell recharge coupons per se but for what it represents i.e., for the code number which it carries and which in turn enables the subscriber to reactivate his connection to the service provider’s net work for a longer duration.  Unlike a transfer of the right to use “goods”, under Article 366 (29A)(d) of the Constitution of India, the contract for “sale” of recharge coupons cannot be bifurcated into one of sale of goods and the other for rendition of telecommunication services.  The “dominant intention test” would apply and, as the very purpose of purchase and sale of the recharge coupons is for extension of the talk time or the validity period which it represents and not for the “paper” or “card” on which it is printed, there is no “sale” of goods falling within the expression in Section 2(28) of the Act.  Consequently the transaction cannot be charged to tax under Section 4(1) of the Act.

Even according to the Revenue, recharge coupons stand on the same footing as SIM cards.  As the Supreme Court, in IDEA Mobile⁹, has held that SIM cards are not “goods” liable to tax under sales tax enactments, it must necessarily follow that recharge coupons cannot also be brought to tax under the Act.  Once it is held that recharge coupons are not liable to tax under the Act, it matters little that the supply of recharge coupon is routed by the service provider through several distributors before it reaches the subscriber.
Entry 47 of Schedule (iv) to the Act, as amended retrospectively with effect from 18.11.2005, includes “coupons” and “cheque books”.  If, for example, a cheque leaf which costs Rs.2/- to print is used to draw Rs.1.00 lakh from the bank, it would defy reason if the “cheque” is treated as “goods”, its sale value as Rs.1.00 lakh, and is brought to tax as “sale” under the Act.   Likewise the recharge coupons which may have costed the service provider less than Re.1 to have it printed, cannot be brought to tax for the value mentioned therein which may range from Rs.10/- to several thousand rupees.  What Entry 47 of Schedule IV represents is sale of the recharge voucher, to the service provider, and not the transaction between the service provider and the subscriber even if, in the process, the recharge coupons are routed through various distributors and retailers.  Supply of “Recharge coupons” by the service provider to the subscriber falls within the ambit of “telecommunication services”. The impugned revisional/appellate/assessment orders, seeking to levy tax under the Act on recharge coupons, are without jurisdiction and illegal.

MOBILE TELEPHONE RENTALS:

It is contended on behalf of the petitioners that they do not collect any amount towards the SIM card or for activation charges from post-paid subscribers; they adopt various tariff plans as per TRAI guidelines; each plan has a fixed and variable portion called bill plan charges/monthly rentals; the variable charges are called “call charges/usage charges”; these terms are adopted as suggested by the TRAI; the bill plan charges are fixed commitment charges that every subscriber is required to pay to the service provider towards the service received by them; monthly rentals/bill plan charges are the minimum assured service receipts of the petitioner from the subscriber; the monthly rentals cannot be treated as consideration for the transfer of the right to use the SIM cards; it is only one or two of the several service providers who have been levied tax on the monthly rentals charged on post-paid SIM cards; the department has itself stopped levying sales tax on telephone rentals from the assessment year 2005-2006 onwards, and such levy for the assessment years upto 2004-2005 is illegal.

On the other hand, it is contended on behalf of the Revenue that monthly rentals are collected towards the SIM card; effective control and possession of the post paid SIM card vests with the subscriber, and not the service provider; the subscriber uses the SIM card at his convenience; irrespective of how the subscriber uses the SIM card, he needs to pay fixed monthly charges towards its use;  this payment is for the transfer of the right to use the SIM card; and the transfer of the right to use a post paid SIM card is a “deemed sale”.

The monthly rentals charged by the service provider, as fixed monthly commitment charges which every post paid subscriber has to pay, is contended by the Revenue to form part of the consideration for transfer of the right to use “SIM cards”.  As noted hereinabove, under the sub-head “SIM cards”, SIM cards are not “goods” on which tax can be levied under the Act.   As rentals are charged each month on post-paid SIM cards, and as “monthly rentals” constitute the consideration received by the service provider for rendering “telecommunication  services”, such monthly rentals cannot be subjected to tax under the Act.

The impugned orders passed by the revisional/appellate/assessing authorities, levying tax on monthly rental collected for post paid SIM cards, is without jurisdiction and is illegal.

VALUE ADDED SERVICES:

It is the case of the petitioners-service providers that SIM/RUIM card based connections, CDMA or WILL or any other kind of connections/extensions/talk time/validity period, RCVs, EVDs, VAS etc., are all services, rendered by the service provider to their subscriber, integral or incidental to “telecommunication service”; software, in value added services, is transferred only telegraphically/telephonically by the use of, and by means of, a telegraph line/telephone connection; value added services involve transmission and receipt of messages i.e., textual, audio and visual data, and are ultimately a form of communication under Entry 31 List I of the VII Schedule read with Section 3(3) of the Indian Telegraph Act; incorporation of the software in a physical medium used for marketing is the sine qua non, and a pre condition, for the transformation of software from a purely intellectual content into “goods”; the “software” must acquire the status of “goods” while still in the hands of the supplier; in these cases there is no supply of software but only of textual, audio or visual signals and messages,  whether it be in the form of information, music or games of one or the other kind; there is no incorporation of the alleged software as “goods” by the service/content provider to the subscriber; even if it is presumed that it is software in process, supply of such software is done by means of a telephone/telegraph line by the subscriber dialing or punching a particular digital number, or sending a signal in the form of an SMS to a particular telephone number; it is received in the mobile instrument of the subscriber telegraphically; the software neither becomes goods nor is there transfer or sale of goods; the alleged software is neither downloaded nor stored in a physical medium (floppy, disc etc) before or for the purposes of being marketed and transferred from the end of the service provider to the destination of the subscriber; the entirety of the telecommunication process is a “service” under the agreement between the service provider and the subscriber; one entire and indivisible contract of telecommunication cannot be broken down so as to isolate an element as the “sale of goods”; value added services, including SMS & MMS etc, represent airtime; ring tones etc., are not contained in any tangible media at the time of sale, and are not “goods”; electromagnetic waves  are only the medium or the means of communication for transmission of signals, or carriage of messages; the software used in “value added services” are not “goods”, and there is neither transfer nor sale of goods.

On the other hand it is contended on behalf of the Revenue that Value added services include downloading of music, ring tones, wall papers, games etc; after they are saved by the subscriber on his mobile, they become his property; they can be used, transmitted or deleted at his will; these down loaded products are intangible goods; the dealer, selling these goods through the mobile, collects charges; this constitutes sale of goods which is liable to tax under the Act;   and value added services, to the extent of down loads, (excluding SMS, MMS, voice messages etc.,), are liable to tax under the Act as they are intangible goods; they are not incidental to telecommunication service, but have a value of their own; the amount received, for value added services, is the sale proceeds received for downloading of songs, games etc.; the proceeds received from value added services are towards supply of software; “software” are “goods”;  the service provider sells these software products through his mobile network; they are sold online; this constitutes sale of products liable to tax as intangible software applications; and the supply of the software of value added services, and installation charges received, are taxable under Entry 2 of the IV Schedule to the Act.

The words “message”, “telegraph” and “telegraph line” are defined in the Indian Telegraph Act, 1885. ‘Message’ is defined therein to mean any communication sent by telegraph, or given to a telegraph officer to be sent by telegraph or to be delivered. “Telegraph” is defined to mean any appliance, instrument, material or apparatus used or capable of use for transmission or reception of signs, signals, writing, images, and sounds or intelligence of any nature by wire, visual or other electro-magnetic emissions, radio waves or hertzian waves, galvanic, electric or magnetic means. ‘Telegraph line’ is defined to mean 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.  The proviso to Section 4(1) enables the Central Government to grant a licence to any person to establish, maintain or work a telegraph within any part of India.  Section 19-B enables the Central Government to confer upon any licensee under Section 4, in respect of the extent of his license, all or any of the powers which the telegraph authority possesses with regard to a telegraph. Section 2(1)(e) of the Telecom Regulatory Authority of India Act, 1997 (for brevity the TRAI Act) defines “licensee” to mean any person licensed, under sub-section (1) of Section 4 of the Indian Telegraph Act, for providing specified public telecommunication services. Section 65(111) of the Finance Act, 1994 defines “telegraph authority” to include a person who has been granted a licence under the first proviso to sub-section (1) of Section 4 of the Indian Telegraph Act. The license conditions, of the licence granted to each of the service providers in these batch of writ petitions, interdict the licensee from assigning or transferring his rights, under the licence, to a third party.  The licence given to a service provider is one for providing telecommunication service, and not for the supply of goods or transfer of the right to use goods. The integrity of the licence can neither be broken nor can the telecommunication service rendered by them be so mutilated. Not only does this position flow from the terms of the contract, this also flows from Section 4 of the Indian Telegraph Act which provides for grant of licence. The transaction of service is a composite one, and is not capable of being disintegrated. (Bharat Sanchar Nigam Ltd.¹). Section 2(j) of the TRAI Act defines ‘service provider’ to mean the Government as a service provider, and includes a “licensee”.  Section 2(k) defines ‘telecommunication service’ to mean service of any description (including electronic mail, voice mail, data services, audio text services, video text services, radio paging and cellular mobile telephone services) which is made available to users by means of any transmission or reception of signs, signals, writing, images and sounds, or intelligence of any nature, by wire, radio, visual, or other electro-magnetic means.

Section 65(109a) of the Finance Act, 1994 defines “telecommunication service” to mean service provided by means of any transmission, emission or reception of signs, signals, writing, images and sounds or intelligence or information of any nature by wire, radio, optical, visual or other electro-magnetic means or systems and to include voice mail, data services, audio tex services, video tex services, fixed telephone services, cellular mobile telephone services, carrier services, and provision of call management services.  Section 65(105)(xxxx) defines “taxable service”  to mean any service provided, or to be provided, to any person in relation to telecommunication service.  Section 65 (36c) defines “development and supply of content” to include development and supply of mobile value added services, music, movie clips, ring tones, wall paper, mobile games, data, whether or not aggregated, information, news and animation films.  Section 65(105)(zzzzb) defines “taxable service” to mean service provided or to be provided to any person, by any other person in relation to development and supply of content for use in telecommunication services.

The contract, between the telecom service provider and the subscriber, is mainly to receive, transmit and deliver the messages of the subscriber through a complex system of fibre optics, satellite and cables.  The subscriber originates/ generates his voice message through the handset. The transmitter in the handset converts the voice into radio waves within the frequency band allotted to the service provider. The radio waves are transmitted to the switching apparatus in the local exchange and, after verifying the authenticity of the subscriber, the message is transmitted to the telephone exchange of the called party, and then to the nearest Base Transceiver Station (BTS). BTS transmits the signal to the receiver apparatus of the called subscriber, which converts the signals into voice, which the subscriber can hear.  (Bharat Sanchar Nigam Ltd¹).
The service provider provides a variety of value added services as are permitted under the agreement. Short Message Service (SMS) is a text messaging service component of a mobile communication system using standardized communication protocols that allow exchange of short text messages between devices. The term SMS is used as a synonym for all types of short text messaging. Most SMS messages are mobile-to-mobile text messages.  Ring tones are created, put into a unique file format and sent to the subscriber’s phone via SMS.

Value added services, like ring tones and music downloads, are audio messages, and the manner of their transmission from the service provider to the subscriber, or from one subscriber to another, is by electro-magnetic waves. Wall paper, like SMS/Text messages, are visual images.  The process of transmission of voice messages is identical to the transmission of data in non-voice messages. Sounds or images are converted into electro-magnetic waves, transmitted through the network of cell towers and servers of the service provider, and are received by the person to whom it is intended in his handset. The mobile handset is both a transmitter and a receiver. Information transmitted/ received by a mobile phone, be it audio or visual, is only by means of electro-magnetic waves. VAS involves only a transfer of data (textual, audio, visual etc.) and/or accessibility (ability to access) of such data or content in the network of the service provider.  “Value added services” fall within the ambit of “telecommunication services” as defined in Section 2(k) of the TRAI Act and Section 65(109a) of the Finance Act, 1994.  Ringtones, music downloads, wall paper, music clips etc., fall within the definition of “development and supply of content” under Section 65 (36c) and constitute “taxable service” under Section 65(105)(zzzb) of the Finance Act, 1994.
Even otherwise it is only if “value added services” such as ring tones, wall papers, games etc., constitute “goods” can their sale/deemed sale be brought to tax under the Act. Section 2(7) of the Sale of Goods Act, 1930 defines “goods” to mean every kind of moveable property other than actionable claims and money, and to include 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 definition of “goods” under the Sale of Goods Act is similar to the definition of “goods” under Section 2(16) of the Act.  The term “goods“, as used in Article 366 (12) of the Constitution of India, includes “all materials, commodities and articles”, and is very wide. It includes all types of movable properties, whether those properties be tangible or intangible.  The Chambers Dictionary – New Edition – Reprint 2000- 2001 defines “Tangible” – to mean perceptible by the touch, capable of being possessed or realized; material, corporeal – a tangible thing or asset i.e., physical property as opposed to goodwill; and “Intangible” to mean not tangible or perceptible to touch; something intangible eg a supplementary asset such as goodwill.  The New Oxford Dictionary defines “Tangible” to mean perceptible by touch ;  and “Intangible” – to mean unable to be touched or grasped; not having physical presence; not constituting or represented by a physical object and of a value not precisely measurable; intangible business property like trade marks and patents. Tangible or intangible property would become “goods” provided they have the attributes thereof having regard to (a) its utility; (b) capability of being bought and sold; and (c) capability of being transmitted, transferred, delivered, stored and possessed. (Tata Consultancy Services v. State of Andhra Pradesh[10]). Intellectual property, when it is put on a physical medium, becomes goods.  The moment copies are made of a software programme, loaded onto discs, cassettes etc., and are marketed as such, they become “goods” liable to sales tax. Sale is not just of the media which, by itself, has very little value. The buyer purchases the intellectual property on the media, and not merely the media independent of the intellectual property i.e. the paper or cassette or disc or CD.  Software, recorded in a physical form, becomes inextricably intertwined with, or part and parcel of the corporeal object upon which it is recorded, be it a disc, tape, hard drive or other device.  A sale of computer software, recorded in a physical form, is sale of “goods” within the meaning of the term as defined in the Sales Tax Act. (Tata Consultancy Services¹⁰; Associated Cement Companies Ltd. v. Commissioner of Customs[11]).

“Value added services”, even if they are held to be software, do not constitute “goods” as they are not recorded in a physical medium before they are marketed or sold, but are merely transmitted through electro-magnetic wages. The process of sending a signal is that it is superimposed on a carrier current or wave by means of a process called modulation. Signal modulation can either be analog or digital. (Bharat Sanchar Nigam Ltd.¹; David Gilles & Roger Marshal: Telecommunications Law : Butterworths). The transfer of software to the subscriber or to his mobile instrument takes place only telegraphically by the use and by means of a telegraph line/electro-magnetic waves.  The transfer does not take place by means of downloading the software from a physical medium (i.e., floppy, disk etc.,) provided by the service provider, into the subscriber’s instrument.  All value added services involve transmission and receipt of messages i.e., textual, audio & visual data.  The service providers carry messages. They are only carriers, and do not have property over the message they carry. This method of carriage of the message is carriage of goods, and not a transfer of the right to use goods, if any.    (Bharat Sanchar Nigam Ltd.¹). Transmission of messages, by the service provider to the subscriber, is by means of Electro-magnetic waves. A subscriber to a telephone service cannot, 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. (Bharat Sanchar Nigam Ltd.¹).
Among the tests to determine whether a property is “goods“, for the purposes of sales tax, is whether the concerned item is capable of being delivered. The essence of the right, under Article 366(29-A)(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 an agreement to transfer the right to use, that the goods are deliverable. If the goods are not deliverable, the question of the right to use those goods would not arise. (Bharat Sanchar Nigam Ltd.¹). Providing access or telephone connection does not put the subscriber in the possession of “electromagnetic waves.” In a sale of goods 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.  “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 a 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 subscriber. Electromagnetic waves are neither abstractable nor capable of delivery. An electromagnetic wave (or radio frequency) does not fulfil the parameters, in Tata Consultancy¹⁰, to constitute “goods”, the right to use of which would be a “sale”. “Electromagnetic waves” are not “goods” within the meaning of the word either in Article 366(12) or in the State legislations. Even for the purposes of Article 366(29-A)(d) “Goods” do not include “electromagnetic waves” or “radio frequencies”. (Bharat Sanchar Nigam Ltd.¹).

“Value added services” are not recorded in a physical medium before they are marketed.  They are merely messages carried by means of Electro-magnetic waves.  Both “Software” which is not recorded on a physical medium before it is marketed, and “Electro-magnetic waves” through which audio and visual messages/signals are transmitted, are not “goods” liable to tax under the Act. Levy of tax on value added services, either under Section 4(1) or 4(8) of the Act, by the revisional/appellate/assessing authorities concerned is without jurisdiction and is illegal.

SHARING OF INFRASTRUCTURE:

Counsel for the petitioners submit that the service providers enter into agreements with various other service providers for use by them of various kinds of infrastructure; there is no transfer of the right to use the equipment; there is no deemed sale under Article 366(29A); the towers are permanent industrial structures and constitute “immovable property”; and, as they are not “goods”, no tax can be levied on them under the Act.

On the other hand it is the case of the respondent-State Government that other service providers are also allowed space on the tower of the owner service provider on a non-exclusive basis; the space provided to them is a pre-identified place on the tower where they  have exclusive right against all other service providers  including the passive service provider; except the beneficiary party no one else can either place their equipment or have access to the designated space/place; other goods, such as air conditioner, diesel generator, electrical wiring, power plant etc., are commonly provided to all infrastructure sharing parties; when common assets are commonly leased to more than one beneficiary party, the consolidated rent/lease amount received represents the consolidated charge for lease of the said equipment; it represents a consolidated transfer of the right to use the said goods; the common facilities include a part of the tower; moveable goods such as  shelter, air conditioning equipment, diesel generator, electrical wiring, electrical installations, power plant, batteries, electricity accumulators, etc., are jointly availed by the co-service providers; their transfer for joint use to all co-service providers for consideration constitutes a transfer of the right to use such facility/goods; the towers were erected at various places, mostly on rented/leased premises;  on termination of the lease, the towers have to be dismantled and taken out; the purpose and method of  annexation of the tower is temporary, and for a limited period;  the tower is movable property; and likewise the equipment provided at the site of the tower are movable property and, hence, “goods”.

For providing telecommunication services, the service providers interconnect their networks with various other operators by inter-connection agreements. The calls generated from one network travels through various networks before they reach the ultimate called party.  Telecommunication involves not only the network of one particular operator, but several cellular operators for carriage and termination of the call.  The whole network system constitutes the telecommunication network either of one operator or collectively of various operators through which telephone services are provided by telephone operators to their subscribers.
Service providers erect towers on sites (either land or roof tops of buildings), for their network operation.   As part of their network, other assets like shelter, air conditioning equipment, diesel generator, electrical wiring, power plant etc are also provided. The structural towers are rooted to the ground with a height of upto 90 metres.  Antennas are fixed on the tower to receive and transmit messages.  On a reciprocal basis, other service providers are permitted to fix their antennas on the tower, and share the infrastructure namely the other equipment, against monthly payment described as “Infrastructure Share Fee”.  Other cellular operators are permitted to bring their own equipment, like BTS, access radio etc., and station such equipment at the site.  Each site has a minimum lock in period of 3 years.   Apart from the antenna fixed on the tower by the beneficiary party, the entire infrastructure is under the control, possession and maintenance of the passive service provider.

The service provider, who erects the tower and locates various equipment thereat, is called the PASSIVE INFRASTRUCTURE SERVICE PROVIDER. Under the ‘infrastructure sharing agreement’ entered into with various other cellular operators, the PASSIVE INFRASTRUCTURE SERVICE PROVIDER shares its infrastructure i.e., tower sites (along with identified assets thereat like room shelter, air conditioning equipment, diesel generator, electrical wiring, power plant, etc) and generates revenue from its infrastructure.  The beneficiary party, (also a service provider), bring their own BTS, access radio and other equipment.  The right, title and interest on such sites, and the identified assets thereon, remain with the PASSIVE INFRASTRUCTURE SERVICE PROVIDER.  The right, title and interest in the BTS, access radio and other equipment brought in by the beneficiary party remains with the beneficiary party.  The PASSIVE INFRASTRUCTURE SERVICE PROVIDER is responsible for obtaining necessary permissions/approvals from local/municipal authorities/ departments. The beneficiary party is entitled to use the identified assets, subject to technical feasibility.   Upgradation is required to be made by the principal owner, after consulting the beneficiary party. The beneficiary party has free access to the identified assets and/or the sites as per the procedure agreed upon by the parties.   Section 11(b)(iv) of the TRAI Act relates to functions of the authority and, under sub-sections (b)(iv) thereof, the authority is required to regulate arrangement amongst service providers for sharing their revenue derived from providing telecommunication services. The consideration, for infrastructure sharing, is arrived at between the parties on the basis of capital expenditure (CAPEX) and Operational expenditure (OPEX) sharing at agreed ratios/parameters. These expenses are collected from each of the other service provider by raising invoices.

The Telecommunication tower, of a height of around 90 metres and embedded either to the earth or to the roof top of a building, is under the control and possession of the passive service provider.  The manner in which this 90 metre huge structure is fastened would necessitate its being excluded from the ambit of “goods”, and included within the category of “immovable property”.  Transfer of the right to use “immovable property” would not fall within the ambit of Section 4(8) of the Act as “immovable property” is excluded from the definition of “goods” under Section 2(16) of the Act.  Section 3(26) of the General Clauses Act,1897 includes, within the definition of the term “immovable property”, things attached to the earth or permanently fastened to anything attached to the earth.   Section 3 of the Transfer of Property Act gives the following meaning to the expression “attached to the earth”:  (a) rooted in the earth, as in the case of trees and shrubs; (b) imbedded in the earth, as in the case of walls or buildings; or (c) attached to what is so imbedded for the permanent beneficial enjoyment of that to which it is attached.  The question whether a chattel is imbedded in the earth so as to become “immovable property” is to be decided on the principles of annexation to the land.  The twin tests are the degree or mode of annexation, and the object of annexation. (Solid and Correct Engineering Works v. CCE[12]).  From a combined reading of the definition of “immovable property”, in Section 3 of the Transfer of Property Act and Section 3(26) of the General Clauses Act, it is evident that, in an immovable property, there is no mobility.  The test of permanency is whether the chattel is movable to another place of use in the same position, or is liable to be dismantled and re-erected at the latter place?  If the answer is yes to the former it must be a movable property and, thereby, it must be held that it is not attached to the earth.  If the answer is yes to the latter, it is attached to the earth.  (T.T.G. Industries Ltd. V. CCE[13]; Ad Age Outdoor Advertising Private Limited, Hyderabad v. The Government of Andhra Pradesh[14]).  The 90 metre huge tower can only be erected at another place after it is completely dismantled at the existing site, and cannot be moved to another place of use in the same position.  The telecommunication tower is, therefore, “immovable property” and not “goods” liable to tax under the Act.

Under Article 366(29-A)(d) levy of tax is not on the use of goods, but on the transfer of the right to use goods. The right to use goods accrues only on account of the transfer of the right and, unless there is a transfer of the right, the right to use does not arise. It is the transfer which is the sine qua non for the right to use any goods. The title to the goods, under sub-clause (d) of Article 366 (29-A), remains with the transferor who only transfers the right to use the goods to the purchaser. Yet, by fiction of law, it is treated as a sale.  Article 366(29-A) has served to extend the meaning of the word “sale” to the extent stated, but no further.  (20th Century Finance Corpn. Ltd. v. State of Maharashtra[15]).

As a telecommunication tower is “immovable property” it does not stand to reason that a part of it, where a beneficiary party fixes its antenna, would become “goods”.  Even if the other equipment located near the tower are held to be “goods”, merely by permitting other cellular operators to use, or in giving them access, to identified assets does not involve any transfer of the right to use such assets, as control and possession of these equipment always remains with the service provider who owns them, and there is no transfer of either control or possession of the equipment in favour of other cellular operators.  The distinction, between mere use of “goods” and “transfer of the right to use goods”, must be borne in mind.  What the co-service providers are permitted is use of the equipment provided at the site of the tower by the passive service provider.  Such usage by them is along with the passive service provider, and other service providers also.  Effective control and possession of such equipment continues to remain with the passive service provider, and is not parted to the other service providers who are merely permitted to use these equipment.

Though there is user of the equipment on a sharing basis there is no transfer of the right to use these goods and, as such, would not constitute “deemed sales” either under Article 366 (29A)(d) of the Constitution of India or under Explanation IV to Section 2(28) of the Act.  Such sharing of infrastructure is incidental to, and a means of, rendition of “telecommunication service”.  The impugned orders passed by the revisional/appellate/assessing authorities, levying tax on the proceeds received by the passive service provider on sharing their infrastructure equipment with other service providers, treating it as “sale” under Explanation (iv) to sub-section (2) of Section 28 of the Act, is without jurisdiction and is illegal.

TELEPHONE INSTRUMENTS, MODEMS AND MOBILE HANDSETS:

It is contended on behalf of the petitioners that telephone instruments are not sold; they are provided to customers free of charge as a part of the end equipment, and no charges are collected for the instruments;  customers have the option to have their own instruments, in which case they are allowed rebate in installation charges;  the fixed monthly charges payable by customers, having either their own instrument or the instrument provided to them, are the same; the telephone instruments are to be surrendered by the customer on closure of service, and full refund of the security deposit is made to them;  Cell phones are not sold or provided, and they have to be procured by the mobile customers themselves; in the case of landline or broadband connections, the subscriber is given the option to choose the bill plan depending on his usage as in the case of SIM card post-paid connections; the petitioners do not charge any amount from the subscriber towards the handset/modem; these devices are incidental to the rendition of “telecommunication service”; even if  it is held that there is a transfer of the right to use the modem and the handset, the consideration cannot be split since Article 366(29A) of the Constitution does not allow divisibility of transactions relating to the transfer of the right to use goods; even if the handsets/modems are held to have been sold, the consideration for the bill plan charged each month cannot be attributed entirely towards the handset/modem; and the department can levy tax only to the extent of the cost of the handset, and not beyond.

On the other hand it is contended on behalf of the Revenue that a handset is installed at the premises of the subscriber for which monthly rent is collected; similarly a modem is installed, and rent is collected, when the subscriber requires an internet connection; there is a right to use “goods” in the case of landline connections; handsets and modems are issued for the use of the subscriber which constitutes a transfer of the right to use “goods”; effective control and possession of the handset and modem rests with the subscriber, and not the petitioner; installation of instruments in the premises of the subscriber meant that possession was with him; monthly rentals are charged for the handset; the contract for providing landline or broadband service may be a composite one, but amounts are being collected separately for providing the instruments; in the case of a broadband connection, a fixed amount is charged towards the modem, and again separate additional amounts are collected depending on the usage of the broadband connection; fixed charges are collected towards transfer of the right to use the handsets and modems; and handsets and modems, issued to the subscriber, involve a transfer of the right to use “goods” which are taxable.

The concept of “sale” in a subscriber’s mind would be limited to the handset that may have been purchased for the purposes of getting a telephone connection. That, and any other accessory supplied by the service provider, alone remain to be taxed under the State sales tax laws.  (Bharat Sanchar Nigam Ltd.¹). Modems are necessary to avail access to the broad band service. Modems are provided to customers who are given the option of paying either fixed monthly charges or the full cost of the modem. Telephone instruments, mobile handsets and modems are “goods”.  If the service provider has sold these goods to the subscriber, then such “sale” is liable to tax under Section 4(1) of the Act.  If, on the other hand, the service provider has supplied telephone instruments, mobile handsets, and modems to the subscriber for their use, it would then amount to a transfer of the right to use these “goods” both under Article 366(29A)(d) of the Constitution of India and under Section 4(8) of the Act, as such supply results in a transfer of the right to use these “goods” by the subscribers.  While the title in the goods, in such cases, may remain with the service provider yet, by fiction of law, it is treated as “sales” as effective control and possession of these goods is with the subscriber and not the service provider.  The contention urged on behalf of the petitioners, that these instruments are supplied free of charge as part of the end equipment and, as such, no tax can be levied thereon, does not merit acceptance.  It is the admitted case of the petitioner-BSNL that, in cases where customers purchase their own instruments, they are offered a rebate in installation charges.  It is, thus, evident that in cases where the telephone instruments, modems and mobile hand sets are supplied by the petitioners, the subscribers are not given any rebate in the installation charges.  In effect, the rebate portion of the installation charges is, admittedly, the consideration received by the petitioners for supply of telephone instruments, hand sets and modems.  This consideration would, undoubtedly, constitute either “sale” or “transfer of the right to use goods” liable to tax either under Section 4(1) or Section 4(8) of the Act.  Even in cases where there is a transfer of the right to use “goods” what can be brought to tax under the Act is only on value of such transfer of the right to use such “goods” and not on “telecommunication services” which the service provider also renders to the subscriber.

In cases where the subscriber purchases a telephone instrument, mobile handset or modem from a vendor other than the service provider, there cannot be any sale of goods or transfer of the right to use such goods by the service provider to the subscriber, and levy of sales tax on “telecommunication  services” rendered by the service provider, and utilized by the subscriber through these “goods” which he has purchased elsewhere, would be illegal.

To the limited extent that telephone instruments, mobile hand sets and modems are either sold or supplied by the service provider to the subscriber, the revisional/appellate/assessment orders levying tax thereupon must be upheld, provided the consideration brought to tax does not include the service element of such a composite transaction of sale and service.  The revisional/appellate/assessing authorities shall pass orders afresh, after putting the petitioners-service providers on notice and giving them opportunity of being heard, in the light of the observations made hereinabove.

CALLER ID INSTRUMENT:

Counsel for the petitioners submit that service charges are levied for providing caller ID instrument, and are included in the monthly bills; leased line circuits are made available to the customers on their specific request; these lines are distinct and different from the usual land lines; rentals are collected only for the service provided to the customer; and applicable service tax is also collected from them.

On the other hand it is the case of the Revenue that the petitioners have installed such caller identity equipment fitted to land-lines wherever the customer has so requested; they have been collecting rental charges for the same; such amounts charged, in respect of sales and on account of rentals on such caller identity equipment, constitute “goods” and are taxable under the Act.

The Calling Line Identification Presentation (CLIP) facility was introduced w.e.f. 1.1.99.  The device or instrument, for availing CLIP facility, is the Caller I.D. instrument.  The Caller ID instrument, procured by the subscriber and connected to the landline telephone instrument, identifies the telephone number of the caller.  Caller I.D. equipment is either procured from the petitioners, or from other Vendors, at the customer’s option, and are utilized by him.

The Caller ID instrument also falls within the ambit of “goods” both under Article 366(12) of the Constitution of India and under Section 2(16) of the Act.  The observations made in this order, in the context of telephone instruments, mobile handsets and modems, would apply equally to caller ID instruments also.  The revisional/appellate/assessing authorities concerned shall pass orders afresh, after putting the petitioners – service provider on notice and giving them opportunity of being heard.

NON-REFUNDABLE DEPOSIT:

It is contended on behalf of the petitioners that the one time fee, collected from distributors, is a security deposit taken from distributors or franchisees; they are received by the service provider for supply of Sim cards, recharge coupons etc; as these are incidental to the rendering of service, the finding that the franchise involves trademark,  trade name, logo, symbol etc is of no consequence; they do not constitute “goods”; there is no element of “sale” involved in taking such security deposit; and levy of sales tax thereon is illegal.
On the other hand, it is contended on behalf of the Revenue that deposits are received by the service providers against supply of telephone instruments, batteries, accumulators etc which are purchased from outside the State;  these deposits become part of the common till, and are utilized by the service providers for their business; the customer applications form define the deposit as a charge; such deposits, received for supply of terminal equipment, network interfacing units etc., constitute the sale consideration; the service provider is not under any contractual obligation to return the deposit charged, and receive back the goods supplied;  similarly the customer has not been conferred any right to return the said equipment, and receive back the entire deposit paid by him to the service provider;  and these transactions amount to “deemed sale” under Sec.4(8) of the Act.

Section 2(29)(b) of the Act defines ‘sale price’ to mean the total amount of consideration for the sale or purchase of goods as may be determined by the assessing authority, if the tax invoice or bill of sale does not set out correctly the amount for which the goods are sold.  If, as contended by the petitioners, the non-refundable security deposit is taken by the service provider, from their distributors, for supply of SIM cards and Recharge coupons, then such deposits cannot be brought to tax either under Section 4(1) or Section 4(8) of the Act as neither SIM cards nor Recharge coupons, or for that matter “non-refundable deposits” constitute “goods” nor is there any “sale” thereof.  If however, as is contended by the Revenue, non-refundable deposits are received against supply of telephone instruments, batteries, accumulators etc., (which are “goods”) then they may well be a form of disguised consideration for the “sale” or the “transfer of the right to use goods”  and, as such, liable to tax under the Act.

The questions which fall for consideration is what is the purpose for which this non-refundable deposit has been taken by the service provider; what the service provider has supplied to their distributors/franchisees; and whether or not this deposit is a disguised form of consideration for the “sale” or the “transfer of the right to use goods”.  Since the impugned revisional/ appellate/assessment orders are being set aside on other grounds, we refrain from examining the aforementioned questions of fact, and leave it open to the revisional/appellate/assessing authorities concerned to examine these questions afresh, in the light of the observations made in this order, after putting the petitioners on notice and giving them an opportunity of being heard.

REFUNDABLE DEPOSITS:

Counsel for the petitioners-service providers would submit that refundable deposits are collected from post-paid subscribers for providing STD, ISD facility etc; based on the security amount, credit limits are fixed for the subscribers; the said facility is part and parcel of telecommunication service; the amount collected as security deposit from the subscribers is to ensure that payment of charges for STD, ISD etc., is not avoided by the subscribers; imposition of sales tax thereon is ex facie without jurisdiction; there is no sale of goods involved; this amount is refundable subject to satisfactory return of equipment and clearance of all outstanding dues.

On the other hand it is urged on behalf of the Revenue  that most of the service providers were collecting these deposits in the name of ‘refundable deposits’ from their customers who were availing land line connections, and fixed wireless telephones; the service provider was receiving / purchasing the equipment such as basic telephone unit, rechargeable batteries, power units, and hand sets from other States, and providing them to their customers; even though these receipts are called “refundable deposits”, the service provider is under no obligation to return the deposit after receiving back the equipment supplied on expiry of the stipulated period;  in these transactions the title and ownership is legally with the service provider; the book value of these equipment, after a period of one year, is almost nil as it has no saleable value and depreciation is claimed thereupon;  the battery and other equipment supplied lose their life, and no replacement is made by the company;  in effect the equipment, provided to the customer, is on a perennial basis; the amount received by the service provider forms part of their common till, and is rotated/utilized for their business purpose;  these deposits are, in reality, the consideration received for use of the goods; these equipment, including consumables such as batteries etc., are transferred on a permanent basis; and amount to a transfer of the right to use the said equipment.

While the Learned Senior Counsel, and the Counsel for the petitioners, would contend that “refundable deposits” are collected from post paid subscribers for providing STD and ISD facility, it is the case of the Revenue that these “refundable deposits” are collected for supply of telephone equipment, rechargeable batteries and handsets to subscribers; and these “goods” are neither returned by the subscriber nor do the service providers refund the security deposit to the subscribers concerned.  The case of the Revenue, in short, is that these refundable deposits are a form of disguised consideration for the transfer of right to use “goods”.
If, as contended on behalf of the service providers, these “refundable deposits” are taken as security for payment due from subscribers who have availed STD and ISD facilities, such deposits can neither be said to be a “sale” nor are there any “goods” involved in such transactions. Consequently these refundable deposits cannot be brought to tax on the premise that there is a transfer of the right to use “goods”.  If on the other hand, as is contended by the Revenue, this security deposit is for supply of telephone instruments, handsets, batteries etc., then they may well be a form of disguised consideration for the transfer of the right to use “goods” as telephone instruments, handsets and batteries would undoubtedly constitute “goods” both under Article 366(12) of the Constitution of India and Section 2(16) of the Act.  These are also questions of fact which we are not inclined to examine in these writ proceedings.  The revisional/appellate/assessing authorities concerned may, after putting the petitioners-service providers on notice and giving them an opportunity of being heard, examine these questions and pass appropriate orders in the light of the observations made in this order.

CONCLUSION:

We summarise our conclusions as under:

1.       SIM cards, recharge coupon vouchers, mobile telephone rentals on post paid connections, value added services such as ring tones, music down loads, wall papers etc., and proceeds received on sharing of infrastructure cannot be subjected to tax either under Section 4(1) or Section 4(8) of the Act.

2.       Telephone instruments, mobile handsets, modems and Caller ID instruments are “goods” both under Article 366(12) of the Constitution of India and Section 2(16) of the Act.

3.       In case these goods are sold or supplied to the subscribers by the service providers such “sale” or the “transfer of the right to use these goods” would be liable to tax either under Section 4(1) or Section 4(8) of the Act.

4.       However, if, these goods are procured by the subscribers from suppliers, other than the service providers or their distributors/franchisees, the monthly charges, which the subscriber is called upon to pay by the service provider, would fall within “telecommunication service” and cannot be made liable to tax under the Act.

5.       If non-refundable deposits are collected, by the service providers from their distributors, as security deposit for supply of SIM cards, recharge voucher coupons and the like, such deposits would not fall within the ambit of “goods” and cannot be brought to tax under the provisions of the Act.

6.       If, on the other hand, the non-refundable deposit is received against supply of telephone instruments, batteries, accumulators etc., and it is established that the said deposit is a disguised form of consideration either for the sale or for the transfer of right to use such goods, then these deposits would form part of the sale consideration and be subject to tax under the provisions of the Act.

7.       Likewise, if refundable deposits are collected from post paid subscribers as security for payment of dues towards STD or ISTD facilities provided by the service provider, then such deposits, not being “goods”, cannot be brought to tax under the Act.

8.       If, however, the refundable deposits are for supply of telephone instrument, hand set etc., which are “goods” and it is established that the deposits are a disguised form of sale consideration, then these refundable deposits may also form part of the sale consideration under Section 2(29)(b) of the Act, and would be chargeable to tax under Section 4 thereof.

The impugned revisional/appellate/assessment orders, under challenge in these writ petitions, are set aside.  As we have held that telephone instruments, modems, mobile hand sets and caller ID instruments are all “goods” and, if the service provider has either sold or has transferred the right to use such goods to the subscriber, such “sale” or the “transfer of the right to use” such goods is liable to tax under Section 4(1) and 4(8) of the Act, the orders of the STAT, under challenge in these TRCs, are set aside. The STAT/ revisional/appellate/assessing authorities concerned shall, in the light of the observations made in this order, pass orders afresh after putting the petitioners on notice and giving them an opportunity of being heard. All the TRCs and the Writ Petitions are allowed.  However, in the circumstances, without costs.
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V.V.S.RAO, J
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RAMESH RANGANATHAN, J
DATE:  08.09.2011
Note:  L.R. copy to be marked.
B/o
MRKR/ASP