2003 (2) TMI 2 - SC - VAT / Sales Tax

Provision of telephone connections is a 'sale' as transfer of right to use goods, telecom authority liable for tax

STATE OF UTTAR PRADESH Versus UNION OF INDIA

SC held that provision of telephone connections constitutes a 'sale' as a transfer of the right to use goods under the U.P. Act, so the telecom authority ... Service Tax - Department of Telecommunication - failed to file return of the turnover of the rentals collected from the subscribers for 'the transfer of right to use' the telephone system during the year 1988 - Justification for passing the order of assessment in view of the extended definition of the expression 'Tax on the sale or purchase of goods' in Clause 29-A of the Constitution of India - supply of telephone connection involve a transfer of the right to use any goods or amount to providing a service - HELD THAT:- According to the DoT, what is being supplied as service is a telephone connection with an instrument which is connected with permanent telephone lines laid up to the subscriber's place where the telephone system is installed and the same is connected with the exchange. Telephone instruments and other movables, including wiring, cable etc., are undoubtedly goods. However, the position of telephone exchange was not without demur on the ground that they were housed in immovable properties. That objection need not detain us because intangible object, like electricity which is generated in projects and transmitted through sub-stations, housed in buildings, has been held to be goods. We, therefore, have no hesitation in holding that telephone connection and all other accessories which give access to the telephone exchange with or without instruments are 'goods' within the meaning of Section 2(d) of the U.P. Act. We have noticed above that the liability to pay tax under the U.P. Act is on every dealer on his turnover of sales of purchases; it is also concluded that telephone connection along with all accessories fails within the meaning of 'goods'; we have also opined that the definition of 'sale' in clause (h) of Section 2 is an inclusive definition and includes a transfer of the right to use any goods for any purpose. 'Service tax' is defined in Clause (34) of Section 65 to mean tax chargeable under the provisions of that Chapter. 'Taxable service' is defined [under sub-clause (b) of Clause 41 of Section 65] to mean any service provided to, inter alia, a subscriber by the telegraph authority in relation to a telephone connection. No provision of the U.P. Act or the said Finance Act, 1994 or the Constitution of India is brought to our notice to hold that rentals collected by the DoT from the subscriber cannot be subjected to tax as is done under the U.P. Act. Merely because service tax is imposed by the Parliament under the said Finance Act in respect of telephone connection to a subscriber, is no ground to hold that the State cannot levy tax under the U.P. Act. Thus, we hold that providing telephone service by the DoT which comprises of allotment of number, installation of an instrument/apparatus and other appliances at the premises of a subscriber, which are connected with a telephone line to the area exchange to enable him to have access to the whole system, to dial and to receive calls, in effect, falls within the meaning of the extended definition of 'sale', viz., within the meaning of 'the transfer of the right to use any goods' and the fact that it is described as service under the ITA 1885 and the Rules made thereunder or under the Finance Act, 1994 would not militate against the same being a 'sale' within the meaning of the U.P. Act. Inasmuch as we have found that the DoT is a 'dealer' as defined in Section 2(c) of the U.P. Act and it collects rentals for the supply of transfer of use of telephone connection, which is compendiously called 'service' and that the supply of telephone satisfies the requirements of a transfer of the right to use the goods within the meaning of 'sale' in Section 2(h); it also receives consideration, therefore, the requirements of charging Section 3 read with Section 3(f) are satisfied. The judgments and orders under challenge in these appeals are, therefore, set aside. We must, however, consider the last submission that the impugned demands relate to not only rentals but also to various other charges and, therefore, for working out the correct demand, the cases have to go back to the assessing officer for raising fresh demand. We find considerable force in that submission. We set aside the demand in question and direct the DoT (the respondent) to file the 'Returns' within three months from today. The Assessing Authority shall make order of assessment and raise fresh demand in accordance with law. Appeals are accordingly allowed. Issues Involved:1. Whether the Department of Telecommunications (DoT) is a 'dealer' under the U.P. Trade Tax Act, 1948.2. Applicability of Section 3-F of the U.P. Act to rental charges collected by the DoT.3. Legislative competence of the State to levy Trade Tax on telephone services.4. Prohibition under Article 285(1) of the Constitution of India against imposing tax on Union property.5. Whether providing telephone service is a sovereign function exempt from trade tax.Detailed Analysis:1. Whether the DoT is a 'dealer' under the U.P. Trade Tax Act, 1948:The High Court held that the DoT (Union of India) is not a 'dealer' within the meaning of the Act. The Supreme Court, however, disagreed. According to Section 2(c) of the U.P. Act, a 'dealer' includes any person or government that buys, sells, supplies, or distributes goods. The definition of 'sale' in Section 2(h) includes the transfer of the right to use any goods for any purpose. The Supreme Court concluded that the DoT, engaging in the transfer of the right to use telephone instruments and systems, falls within the ambit of a 'dealer' under the U.P. Act.2. Applicability of Section 3-F of the U.P. Act to rental charges collected by the DoT:The High Court confined Section 3-F only to goods involved in the execution of works contracts. The Supreme Court clarified that Section 3-F also applies to the transfer of the right to use any goods. The DoT's activity of providing telephone connections involves the transfer of the right to use telephone instruments and systems, thus falling under the purview of Section 3-F.3. Legislative competence of the State to levy Trade Tax on telephone services:The High Court ruled that the State lacks legislative competence to levy Trade Tax due to the imposition of service tax by the Parliament under the Finance Act, 1994. The Supreme Court rejected this view, stating that the imposition of service tax does not preclude the State from levying trade tax under the U.P. Act. The Court emphasized that the extended definition of 'sale' in Article 366(29A) of the Constitution allows the State to tax the transfer of the right to use goods.4. Prohibition under Article 285(1) of the Constitution of India against imposing tax on Union property:The High Court's judgment, which was not supported by the respondents-DoT, was that Article 285(1) prohibits the State from imposing any tax on Union property. The Supreme Court did not address this issue in detail as it was conceded by the respondents-DoT.5. Whether providing telephone service is a sovereign function exempt from trade tax:The High Court held that providing telephone service through the DoT is a sovereign function and cannot be subjected to trade tax. The Supreme Court, however, did not support this view. The Court noted that the DoT's activity involves the transfer of the right to use telephone instruments and systems, which constitutes a 'sale' under the U.P. Act, and thus, it is subject to trade tax.Conclusion:The Supreme Court set aside the High Court's judgment, holding that the DoT is a 'dealer' under the U.P. Act, and its activity of providing telephone connections involves the transfer of the right to use goods, falling within the definition of 'sale.' The Court directed the DoT to file returns within three months, and the Assessing Authority to make fresh assessments and raise demands accordingly. The appeals were allowed with costs.