Subject: Levy of Sales Tax on Services liable to Service Tax in the context of recent Supreme Court Judgment in the case of BSNL.

Speaker – Shri P.C. Joshi, Advocate

The thirteenth study circle meeting for the year 2005-06 was held on 5th April, 2006 at the S.T.P. Association Library.

At the outset, the learned Speaker said that according to Article 141 of the Constitution, a judgment of Supreme Court is the law of the land and is binding on all the authorities in the country. In other words, no court can take a contrary view to the one taken by the Supreme Court. A question had arisen in the initial stage before the Supreme Court, how far it would be good for one division bench to depart from the decision of another division bench. The question was then referred to larger bench consisting of nine Judges and it was decided in the case of Naresh Sridhar Mirajkar vs. State of Maharashtra (AIR 1967 Page 1 S.C.) by this larger bench, that unless a judgment in question is overturned or overruled by a due process of law, no division bench should easily depart from the judgment of the earlier division bench. A division bench judgment is thus always binding on the other division bench. But off late, it is observed that by the time the law is settled by the Supreme Court and a judgment is properly understood by us, there is a thunderbolt from the Supreme Court that the earlier judgment given is not a correct law. The learned speaker wondered whether under such scenario, how one can advise one’s clients correctly? Which judgment are we to follow? Are we sure about it?

The learned speaker then said that the month of March 2006 is a very historical month for all of us because of the following important events that took place:

2nd March: A bench of three judges upturned the earlier judgment of division bench in Union of India Vs. State of U.P. (130 STC Page 1)

3rd March: Bombay High Court in Hari & Co.s case held that xeroxing is liable to Works Contract tax. The Tribunal had held it as a service contract.

4th March: Amendments made in Rules regarding submission of returns by the State of Maharashtra

21st March: State Budget was presented without any relief.

On BSNL judgment

Giving details, the learned speaker informed the meeting that the said judgement is spread over 121 paras, printed in 40 pages and one and a half page consists of only names of advocates and solicitors who appeared in the case. In all, 41 judgments from various courts of the land and 5 judgments of foreign countries have been referred to by the Supreme Court in the case of BSNL. The learned speaker advised that in order to understand the judgment properly, the same should be read 3 to 4 times and not once.

Explaining the details, he said that the following matters have been referred to by the Supreme Court in BSNL judgment:

1. Problems of Service Contract:
   Rainbow Colour Lab., A.C.C., C. K. Jidheesh discussed.
    

2. Lease Transactions: 20th Century and Rashtriya Ispat Nigam discussed.
    

3. The term "Goods" discussed with reference to the decisions given in A. Dhanraj, Vikas Sales, Sunrise cases.

Controversy before the Supreme Court:

The controversy before the apex court was whether Sales Tax is leviable on telephone and mobile telephone services?

The High Courts of Andhra Pradesh, Allahabad and Punjab & Haryana had held that Telephone connection and Mobile phone services are rendered through the entire system. The telephone instrument or mobile phone is just a mode of rendering services and therefore no sales tax is leviable. These three judgments were overruled by the Supreme Court in 130 STC 1. (Union of India vs. State of U.P.) The apex court took a view that not only telephone or mobile instrument or Sim Card was liable to Sales tax, but also the entire system; i.e., cables, telephone exchange machinery etc. were liable, because the subscriber got right to use the system.

Kerala High Court in Escotel Mobile Communication

The Kerala High Court took a view that the Sim Card is goods of incorporeal nature and value thereof is to be added to the other portion of Services and is liable to Service Tax. Similarly Service portion is to be added to the value of Sim Card and Sales Tax is leviable. Thus both Service Tax and Sales Tax can be leviable as both the levies are by different legislature. There is no question of double taxation.

This being the judgment of the Kerala High Court in Escotel, an appeal petition was filed in the Supreme Court by Escotel, B.P.L. and other companies. The division Bench, before whom the appeal came up for hearing, found that the matter requires reconsideration and therefore referred it to the larger bench which delivered the judgment in the case of BSNL.

All the writ petitions under Article 32 plus appeal by Escotel were decided by the larger bench in BSNL’s case.

In the meantime against the decision in the case of Union of India vs. State of U.P. 130 STC 1 S.C. wherein a view was taken that everything is taxable, a Review Petition has been filed which at present is pending in the Supreme Court.

The question before the Supreme Court in BSNL case was what is the nature of transaction in case of rendering telephone services – landline, mobile or both. The question was whether it is a sale liable to sales tax or it is a service liable to service tax or both Sales Tax and Service Tax?

Turning down the preliminary objection taken by the states on the principles of "res judicata", the larger bench said that as far as taxation matters are concerned and specially where there are different periods of assessment, there is no question of "res judicata" being followed.

Petitioner’s arguments : (BSNL, VSNL, MTNL, Escotel)

All the petitioners argued before the larger bench that they render only services. Dominant object of anybody approaching them is to get service and that instrument is just a tool/ or mode and therefore there should be no tax under the Sales Tax laws. According to them, the whole action to levy tax by the State was unconstitutional because only Parliament is having right to levy tax on the transaction of such nature.

The petitioners further demanded that the decision in 130 STC 1 should on this count, be overruled. The stand of petitioners was supported by the Union of India by saying that all of them were rendering services and therefore no sales tax could be levied.

Transactions covered by Article 366, clause 29A (a to f)

It was further submitted before the larger bench that if a transaction does not fall within the category of sub-clauses (a) to (f) (deemed sale) of clause 29A of Article 366, no tax can be levied by the State on such transactions and if levied, the same would be unconstitutional. For this purpose petitioners relied on the famous case of Everest Copier, Hindustan Aeronautics and Rainbow Colour Lab.

It was also argued that for providing a telephone service, the entire system is required to be used and not merely a telephone or mobile instrument. An instrument is required to be "connected" with the exchange and a Sim card is to be "activated". The telephone instrument itself is not a system and therefore no sales tax can be levied.

It was also argued further that the State’s attempt to levy tax, considering the transactions as that of "lease" for using radio frequencies and wave lengths, is also not correct because complete possession and effective control remain with the lessor; i.e., Telephone Company and not with the lessee i.e. telephone user.

Expression "Telephone" as defined in Telegraph Act

"Telephone" as defined, does not include any Service. A subscriber, as a matter of right, uses the instrument. The instrument cannot be called an immovable property. The company is charging rental for using the instrument and therefore there is a complete transfer of right to use the instrument including the Sim card in case of mobile. It was also contended that rendering service of telephone and using telephone instrument are two distinct and separate transactions, unconnected with each other. On both the transactions, tax can be levied. On service portion, service tax and on instrument, Sales Tax.

366, clause: 29A (d) "Right to use goods for any purpose":

It was argued further that "any purpose" would include services also and therefore tax is rightly covered under Article 366, 29A(d). After the 46th amendment the concept of dominant intention of getting services only, has gone. The moment there is transfer of right to use, the tax is attracted. Transfer of right to use radio frequency and wave length assigned to a particular service provider being intangible and incorporeal asset, attract the lease tax under Article 366, 29A(d).

Issues before the Supreme Court

The learned speaker therefore said that before the Supreme Court the following five issues were there to be considered:

1. Whether telecommunication transactions involve any "goods" within the words "goods" used in the Article 366, 29A(d)? (Lease)
    

2. Whether there is any transfer of right to use goods involved in providing the services in question, vide Article 366, 29A (d) and whether access to telephone facility to subscriber involve any transfer of right to use any goods?
    

3. Whether there was a transaction of composite nature involving sale and service. If so, whether sale portion can be taxed?
    

4. Whether the transactions involve any inter State sales?
    

5. Can "aspect theory" be relied on by the States for levying sales tax on the same transaction on
   which Parliament has levied Service Tax?

The learned speaker observed that while considering the above five issues before it, the Supreme Court referred to the historical background right from 9 STC 353 to the passing of the 46th amendment to the Constitution and observed that each and every non sale transactions of Article 366, 29A(a) to (f) involve absence of some or the other necessary ingredient for the purpose of sales as understood under the Sale of Goods Act. The 46th amendment was brought to do away with the effect of the court judgment, favourable to the dealers on each type of transactions covered by the sub-clauses (a) to (f). These all transactions related to the supply of goods by unincorporated entities. Now by the 46th amendment, all these transactions covered by sub-clauses (a) to (f) of clause 29A of Article 366, entered into by any person, buyer or seller are transactions considered to be "deemed sales" and therefore liable to tax. However the Supreme Court stated that this fiction created by the 46th amendment applies only to those Six transactions covered in sub-clauses (a) to (f) of 29A and nothing more. In other words one cannot assume a transaction to be that of sale, try to levy tax and then find out what is the portion of goods which is liable to Sales Tax even though there is incidental use of materials in the course of services etc. The theory of "Divisible Contract" can apply only to these six types of transactions.

Para 43 of the judgment

The learned speaker said that Para No. 43 of the judgment is very important for all of us. It says that there are two aspects of the matter which have survived the amendment of 366, 29A. In other words, two aspects have not been touched by the amendment of 366, 29A(b) in works contract:

1. The word "Sale" has to be considered as understood in the Sale of Goods Act. All transactions which are not expressly covered by (a) to (f) of 29A, are not hit by the amendment. If all the ingredients of "sale of goods" are present, the department cannot say it is a transactions within 46th amendment.
    

2. All the sub-clauses (a) to (f) of 29A do not contain goods. It is only three sub-clauses; i.e., (b),(c) and (f) which contains goods. If transfer of good in (b), (c) and (f) is according to "Sale of Goods Act", no tax can be levied under Article 366, 29A, because all the ingredients of "sale" are present.

The learned speaker then said that unfortunately the life of judgment in the case of C. K. Jidheesh was only for about 4 months. In BSNL, three judges found that observations in the case of C.K. Jidheesh in regard to ACC was not correct, and ACC’s observation regarding Rainbow was correct. The learned speaker observed that this is very unhappy. He felt that unless BSNL’s judgment is reversed by the 5 Judges’ Bench or larger bench, there is no hope. At present, the learned speaker opined, C.K. Jidheesh and Rainbow Colour judgements are done away with.

The learned speaker then observed that by BSNL’s judgment, everything is not lost. There is a window kept open by the Supreme Court itself. ACC judgement has never said that in all composite transactions 366, 29A will apply. Therefore, if the category of transactions is not covered by (a) to (f) of 29A, it will be outside the purview of 46th amendment and in those cases again dominant intention will come into picture. This will help us.

The learned speaker highlighted this fact by saying that the purchaser and the seller of the goods should have the "same idea" regarding purchase and sale of goods. If there is a difference, the same will not be a transaction of sale. Therefore the "intention" must be found out. The learned speaker remarked that the theory of dominant intention is followed by the Bombay High Court in case of "Mudran Parisad (139 STC 193) even after C.K. Jidheesh, ACC and Matushree.

The learned speaker felt that some impression created by BSNL’s judgment that it has doubted 20th Century Finance, is not correct. On the contrary, he said that "20th Century Finance" case has been discussed in details for "situs of sale". 20th Century Finance was not at all concerned with composite contract and its bifurcation etc. It has never said that effective control and possession of the asset is not necessary to remain with lessee. It was concerned only with the "situs of sale".

The learned speaker then read para No. 108 of the judgment which explained the role of Electromagnetic waves in order to transmit voice message from one place to another through telephone system. The learned speaker concluded his speech with a Gujarati saying "Bhagwan ek bari
bandh kare chhe to biji das bari khole chhe".