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

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

M/s BHARTI AIRTEL LTD & OTHERS Versus STATE OF KARNATAKA FINANCE DEPARTMENT & OTHERS

The court ruled in favor of the petitioners/appellants, setting aside the re-assessment and assessment orders by the Assessing Authority. It declared that ... Levy of sales tax / VAT on telecommunication service - Legislative powers - Constitutional validity - Held that: - The light energy which is used as a carrier in telecommunication service for rendering service is covered by the Parliamentary Legislation i.e. the Finance Act, 1994 read with Section 65 (109-a). It does not fall within the Entry 54 of List-II of VII Schedule. - The contract in question is not a composite contract. It is an indivisible contract and a contract of service simplicitor. There is no element of sale at all to any extent. It is not a contract of sales simplicitor as contended by the State. - It is declared that the light energy (Artificially Created Light Energy - ACLE) is one form of electromagnetic waves. It is not 'goods' as defined in Article 366 (12) of the Constitutions of India or under Section 2(m) of the Karnataka Sales Tax Act, 1957 or Section 2 (15) of the Karnataka Value Added Tax, 2003. Consequently, there is no sale of goods as held by the Assessing Authority. Therefore they have no power to levy tax. - The judgment of BSNL and other Vs. Union of India and others reported in [2006 (3) TMI 1 - Supreme court] squarely applies to the facts of these cases. 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.