2011 (2) TMI 307 - HC - VAT and Sales Tax

Court rules telecommunication services not 'goods' under tax laws, setting aside assessment orders.

The court ruled in favor of the petitioners/appellants, setting aside the re-assessment and assessment orders by the Assessing Authority. It declared that ... Sale of goods - telecommunication service - Artificially Created Light Energy (ACLE) - goods as defined in Article 366(12) - dominant nature test - Article 366(29-A) - deemed sales - Entry 54, List II (state power to tax sale of goods) - Entry 97, List I / residuary power to tax services - service tax under the Finance Act, 1994 (Section 65(109a)) - licence under Section 4 of the Indian Telegraph Act - binding precedent and Article 141 of the ConstitutionArtificially Created Light Energy (ACLE) - goods as defined in Article 366(12) - telecommunication service - ACLE used as a carrier in optical fibre transmission is not 'goods' within Article 366(12) or the statutory definitions - HELD THAT: - Having considered the technical material on record and the Supreme Court's analysis in BSNL, the Court held that the artificially created light energy is a form of electromagnetic wave used merely as a carrier for transmission of information. It does not satisfy the legal attributes of goods - marketability, abstraction by the consumer, delivery to or consumption by the subscriber, storage or possession by the subscriber - and therefore cannot be treated as 'goods' under Article 366(12) or the Karnataka sales/VAT definitions. The court rejected the assessing authority's conclusion that ACLE is abstractable, deliverable or consumed by the subscriber, finding instead that the energy is generated and used by the service provider to effect transmission and drops out within the network without ever becoming an item in the market or the subject of a sale.ACLE is not 'goods' and cannot be treated as saleable goods for the purpose of State sales tax/VATSale of goods - dominant nature test - Article 366(29-A) - deemed sales - Contracts for transmission of data by telecom service providers are not sales of goods; they are contracts for service simplicitor and not composite contracts capable of being recharacterised as sales under the dominant-nature test or Article 366(29-A) - HELD THAT: - The Court examined the written contracts and licence conditions and applied the established legal tests (including the dominant-nature inquiry and the scope of Article 366(29-A)). The contractual documents and licence regime demonstrate that the parties contracted for transmission of messages/data as a service; there is no agreement to transfer title in any goods to the subscriber. Except for the specific categories constitutionally deemed to be divisible (e.g., works and catering contracts), a composite-in-form contract cannot be disintegrated into a sale absent clear intention of the parties. On the facts, the contract is indivisible and service simplicitor, so the State cannot treat the transaction as a sale of goods.The telecom contracts are contracts of service simplicitor; no element of sale of goods exists that would empower State taxationEntry 97, List I / residuary power to tax services - Entry 54, List II (state power to tax sale of goods) - service tax under the Finance Act, 1994 (Section 65(109a)) - Transmission activities using light energy fall within Parliamentary competence to tax services and do not fall within the State's Entry 54 power to tax sale of goods - HELD THAT: - Because ACLE is not 'goods' and the transaction is a service, the activity falls under the Parliamentary legislative field (residuary Entry 97 backed by Article 248 and the Finance Act, 1994 definitions, including Section 65(109a)). The Court held that State Entry 54 cannot be invoked to tax the service element of telecommunications or to recharacterise the activity as a sale of ACLE. The decision aligns with the Supreme Court's reasoning that telecommunication is essentially a service and that electromagnetic waves are not goods.State lacks legislative competence to levy sales tax/VAT on the light-energy transmission aspect; the matter falls under Parliamentary service taxationBinding precedent and Article 141 of the Constitution - BHARAT SANCHAR NIGAM LTD. v. Union of India - The Supreme Court's decision in the BSNL case applies and is binding; the State and assessing authorities cannot ignore or distinguish that precedent on the facts presented - HELD THAT: - The Court analysed the scope of the BSNL judgment, noting that it addressed the nature of telecommunication transactions generally (including reference to fibre optics) and expressly held electromagnetic waves not to be 'goods'. The High Court emphasised the binding force of Supreme Court precedent under Article 141 and rejected attempts to distinguish BSNL by reference to OFC or alleged scientific points not placed before the Supreme Court. The State's review petition to the Supreme Court was dismissed; the High Court held that subordinate authorities were bound by BSNL and could not relitigate the same questions merely because some technical angle was argued later.BSNL binds the parties; the reassessments premised on distinguishing or ignoring that precedent are contrary to Article 141Alternative remedy - maintainability of writ jurisdiction - constitutional issues - Writ petitions were maintainable despite availability of statutory appeals because principal questions were constitutional and involved application of a binding Supreme Court precedent - HELD THAT: - While statutory appeals exist, the Court found that the proceedings raise substantial constitutional questions (legislative competence, application of Article 141) and involve enforcement of a binding Supreme Court ruling that subordinate authorities were attempting to evade. The Court also noted that the State machinery had taken a policy posture to relitigate and therefore relegation to the statutory appellate forum would be an empty formality; accordingly, High Court jurisdiction to decide the constitutional issues on merits was properly exercised.Writ petitions were maintainable and appropriately entertained by the High CourtReassessment orders - rule of law - Impugned reassessment/assessment orders imposing sales tax/VAT on telecommunication revenue were set aside and quashed - HELD THAT: - Applying the legal conclusions that ACLE is not goods, the contracts are for services, and that BSNL governs, the Court held the reassessment and assessment orders that levied sales tax/VAT on transmission receipts to be without jurisdiction and contrary to law. The High Court accordingly set aside those orders and directed payment of costs by the State to petitioners, including a direction to deposit a portion to the Advocates' Welfare Fund.Impugned reassessment and assessment orders levying sales tax/VAT were set asideFinal Conclusion: The High Court allowed the writ appeals/petitions: holding that the artificially created light energy used in optical-fibre telecommunication is not 'goods', that telecom transmission contracts are contracts for service simplicitor (not sales), that the BSNL Supreme Court decision is binding and applicable, that State sales tax/VAT could not be levied on the transmission receipts, and setting aside the impugned assessment/re-assessment orders; costs were awarded in favour of the petitioners. Issues Involved:1. Competence of the State to levy Sales Tax/VAT on telecommunication services.2. Interpretation of constitutional and statutory provisions.3. Rule of law regarding the levy of sales tax on telecommunication services.Issue-wise Detailed Analysis:1. Competence of the State to levy Sales Tax/VAT on telecommunication services:The primary issue was whether the State of Karnataka could levy Sales Tax/VAT on telecommunication services provided by companies like BSNL, Tata Teleservices, and Bharti Airtel. The court examined the constitutional provisions and previous judgments, particularly the Supreme Court's ruling in BSNL vs. Union of India (2006), which held that no sales tax could be levied on telecommunication services under state sales tax laws. The court reiterated that telecommunication services fall under the purview of service tax as defined in the Finance Act, 1994, and not under the state's jurisdiction to levy sales tax.2. Interpretation of constitutional and statutory provisions:The court delved into the interpretation of Article 366(12) of the Constitution, which defines 'goods,' and Article 366(29-A), which includes certain transactions as 'deemed sales.' The court examined whether the 'artificially created light energy' (ACLE) used in optical fiber cables (OFC) for data transmission could be classified as 'goods.' It concluded that ACLE is a form of electromagnetic wave and not 'goods' as it does not meet the criteria of being marketable, abstractable, consumable, or deliverable. The court emphasized that the contract between the service provider and the subscriber is for service and not for the sale of goods.3. Rule of law regarding the levy of sales tax on telecommunication services:The court scrutinized the actions of the State and its authorities in attempting to levy sales tax on telecommunication services despite the binding precedent set by the Supreme Court. It highlighted the State's disregard for the Supreme Court's judgment and its efforts to distinguish the judgment on unfounded grounds. The court stressed the importance of adhering to the rule of law and respecting judicial precedents. It concluded that the State's actions were arbitrary and without legal basis.Judgment:The court allowed the writ appeals and writ petitions, setting aside the re-assessment and assessment orders passed by the Assessing Authority. It declared that:- The light energy used in telecommunication services is not 'goods' under Article 366(12) of the Constitution or under the Karnataka Sales Tax Act or Karnataka Value Added Tax Act.- The contract between the service provider and the subscriber is an indivisible contract of service, not a composite contract involving the sale of goods.- The judgment of the Supreme Court in BSNL vs. Union of India (2006) applies to the facts of these cases.- The State has no power to levy sales tax on telecommunication services.The court also directed the State to pay costs of Rs. 1,00,000 to each petitioner/appellant and deposit Rs. 3,00,000 to the Advocates' Welfare Fund.