TaxTMI 
TaxTMI 
2010 (2) TMI 1093
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....n that the main matter in the appeals be disposed of by this court. Hence, we have heard these writ appeals for final disposal. The demand made by the respondent-authority under the Karnataka Value Added Tax Act, 2003 ("the KVAT Act", for short) pursuant to assessment orders passed against the appellants was challenged before the learned single judge who dismissed the writ petition on the ground that it was not proper to examine the nature of the controversy involved in these cases under articles 226 and 227 of the Constitution of India and that the petitioners could file appeals before the authorities and accordingly, the writ petitions were dismissed. Being aggrieved by the said order, these writ appeals have been preferred. The factual matrix, which gives rise to, these appeals are that, the appellant which is a wholly-owned Government of India company incorporated under the provisions of the Companies Act, 1956 and established as the Commercial Arm/Corporate Front of the Government of India, Department of Space, has been nominated as the contract manager for administering specific contracts between Department of Space and private parties for "transponders" on INSAT satell....
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....mercial Tax Department. According to the appellant, the second respondent by an order dated September 4, 2008 permitted the first respondent to initiate proceedings for reassessment under section 39 of the KVAT Act and pass orders of assessment under the provisions of the Karnataka Tax on Entry of Goods Act, 1979 and the Central Sales Tax Act, 1956. Pursuant to the said order, the first respondent issued a proposition notice dated October 16, 2008 for the period commencing from April, 2005 up to July, 2008, inter alia, calling upon the appellant to show cause as to why the turnover related to rental receipts towards lease of space segment capacity in the transponders should not be taxed under the provisions of the Act as constituting the transfer of the right to use goods. As per annexure E to the writ petition, the appellant filed detailed reply by way of objections dated November 19, 2008 and additional objections dated December 13, 2008 objecting to the proposals made by the first respondent by contending that there was no transfer of property or any goods which would attract the provisions of the Act. The same is produced as annexures F and G to the writ petitions. The first....
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....bandwidth in terms of the agreement entered in the State of Karnataka by using the "INSAT master control facility" at Hassan, Karnataka State was a sale. Hence, the activity of a dealer in leasing out the facility to the customers of the appellant to use the transponder is "sale" within the definition of section 2(29) of the KVAT Act, 2003 and the receipts are qualified as "turnover " for the purpose of section under section 2(35) and by virtue of section 3 of the Act, the turnover tax was at 12.5 per cent, but the petitioner had not declared the said taxable turnovers to the Department, in any of the returns filed for the months of April, 2005 to July, 2008. Therefore, the proposition notice was issued to levy tax on leasing of facility to use the transponders and also access fee and royalty fee collected and the objections filed by the dealer was examined in the light of the lease agreement which would constitute a sale under the provisions of the KVAT Act and therefore, the proposition notices were justified in law. The respondents therefore, have sought dismissal of the writ petitions. The learned single judge dismissed the said petitions by observing that the petitioners....
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....wer to the contentious points. Per contra, learned Advocate-General submitted that the appellant is a commercial arm of the Department of Space. The facility to use the segment of the transponder can be leased as well as sub-leased. Therefore, there is a sale of the facility to be used by the customers within the meaning of section 2(29) of the KVAT Act. He has drawn our attention to the reply given by the appellants and has stated that in view of the advancement in science and technology a purposeful interpretation must be given to the sections of the Act. He has also stated that for the ruling of the Authority of Advance Ruling is not applicable to the present case because the said ruling with regard to navigation satellite, whereas the present case deals with the communication satellite. He has also stated that since the agreement has been entered into within the State of Karnataka, section 6(4) of the Act has no application. He has also adverted to certain decisions in support of his submission that the respondentauthorities were justified in issuing the demand notices against the appellant. He also drew our attention to the order of the apex court in the case of Bharathi Ai....
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....t unless the context otherwise requires, the expressions defined in that article shall have the meaning assigned respectively to them in that article. The expression "goods" defined in article 366(12) has included all materials, commodities and articles. It is an inclusive definition and therefore not exhaustive. It refers to a tax on the transfer of trade in goods and while referring to the transfer, delivery or supply of any goods that takes place as per sub-clauses (a) to (f) of clause (29A) of article 366 of the Constitution of India. The latter part of the said clause contains "such transfer, delivery or supply of any goods" shall be deemed to be sale of those goods by the person making the transfer, delivery or supply and purchase of those goods by the person to whom such transfer, delivery or supply is made. Hence, the transfer of any goods in sub-clauses (a) to (f) of clause (29A) of article 366 of the Constitution is by way of a deeming provision. The object of the new definition of clause (29A) of article 366 is to enlarge the scope of tax on sale or purchase of goods wherever it occurs in Constitution so that it may include within its scope, the transfer, delivery or sup....
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....e, which implies the transfer of the goods to the bailee. In the case of sub-clause (d), the goods are not required to be left with the transferee. All that is required is that there is a transfer of the right to use the goods. In our view, therefore, on a plain construction of sub-clause (d) of clause (29A), the taxable event is the transfer of the right to use the goods regardless of when or whether the goods are delivered for use. What is required is that the goods should be in existence so that they may be used. And further contract in respect thereof is also required to be executed. Given that, the locus of the deemed sale is the place where the right to use the goods is transferred where the goods are when the right to use them is transferred is of no relevance to the locus of the deemed sale. Also of no relevance to the deemed sale is where the goods are delivered for use pursuant to the transfer of the right to use them, though it may be that in the case of an oral or implied transfer of the right to use goods, it is effected by the delivery of the goods. 27.. Article 366(29A)(d) further shows that levy of tax is not on use of goods but on the transfer of the right to us....
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.... (b) The appropriate Legislature by creating legal fiction can fix situs of sale. In the absence of any such legal fiction the situs of sale in case of the transaction of transfer of right to use any goods would be the place where the property in goods passes, i.e., where the written agreement transferring the right to use is executed. (c) Where the goods are available for the transfer of right to use the taxable event on the transfer of right to use any goods on the transfer which results in right to use and the situs of sale would be the place where the contract is executed and not where the goods are located for use. (d) In cases where goods are not in existence or where there is an oral or implied transfer of the right to use goods, such transactions may be effected by the delivery of the goods. In such cases the taxable event would be on the delivery of goods. (e) The transaction of transfer of right to use goods cannot be termed as contract of bailment as it is deemed sale within the meaning of legal fiction engrafted in clause (29A)(d) of article 366 of the Constitution wherein the location or delivery of goods to put to use is immaterial." As far as the Karna....
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....iation would have in a sense been both the supplier and the recipient of the supply of goods. Now such transactions are deemed sales. Subclause (f) pertains to contracts which had been held not to amount to sale in State of Punjab v. Associated Hotels of India Ltd. [1972] 29 STC 474; [1972] 1 SCC 472. That decision has by this clause been effectively legislatively invalidated." The apex court thus held that all the sub-clauses of article 366(29A) serve to bring transactions where one or more of the essential ingredients of a sale as defined in the Sale of Goods Act, 1930 are absent within the ambit of purchase and sales for the purposes of levy of sales tax and the amendment especially allows specific composite contracts, viz., works contracts, hire-purchase contracts, catering contracts, by legal fiction to be divisible contracts where the sale element could be isolated and be subjected to sales tax. The apex court ultimately held that in the context of providing a telephone connection that electromagnetic waves or radio frequencies are not goods for the purpose of article 366(29A) of the Constitution and that the goods in telecommunication are limited to the handsets suppli....
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....he basis that, an incorporeal right is also "goods" for the purpose of levy of sales tax, whether electro magnetic waves by which data generated by the subscriber was transferred to the desired destination, can fulfil the criteria laid down in Tata Consultancy [2004] 137 STC 620 (SC); [2005] 1 SCC 308 as goods was considered. After referring to scientific explanations of "electromagnetic waves" in the context of definition of the word "goods" under article 366(12) and section 2(7) of the Sale of Goods Act, 1930 and the definitions of "goods" in various sales tax legislations of the States, held, that electromagnetic waves are neither abstracted nor are they consumed, in the sense they are not extinguished by their user. They are not delivered, stored or possessed. Nor are they marketable. They are merely, the medium of communication. What is transmitted is not an electromagnetic wave, but the signal through such means and the signals are generated by the subscribers themselves. On the said reasoning it was held that a subscriber to a telephone services could not reasonably be taken to have intended or purchase or obtain any right to use electromagnetic waves or radio frequencies wh....
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....or the purpose of sales tax took place in the context of sub-clause (d) of article 366(29A) and it was held that the transfer of right to use took place where the agreements were executed and in that context it was observed that delivery of goods cannot constitute a basis for levy of tax on the transfer of right to use any goods. It was further clarified that in determining the situs, transfer of right to use the goods, the court did not say that the delivery of goods was inessential for the purpose of complete transfer of right to use. But it was emphasised that actual delivery of the goods is not necessary for effecting the transfer of right to use the goods, but the goods must be available at the time of transfer must be deliverable and delivered at some State. That at the time of execution of any agreement to transfer of right to use that the goods are available and deliverable. If the goods are such that, are not deliverable at all, the question of right to use the "goods " would not arise. But if there are no deliverable goods in existence, there is no transfer of user at all. Therefore, whether the goods are tangible or intangible, they must be deliverable. While holding so,....
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.... also clarified that, whether the goods are tangible or intangible, they must be deliverable for the purpose of sales tax, even in the context of sub-clause (d) of clause (29A) of article 366 of the Constitution of India. The transfer of right to use would take place, where the agreements are executed and in that context, in 20th Century Finance Corpn.'s [2000] 119 STC 182 (SC); [2000] 6 SCC 12 it was observed that, delivery of goods cannot constitute the basis for levy of tax but the transfer of right to use the goods is the basis for tax. But the court emphasised that actual delivery of the goods is not necessary for effecting the transfer of right to use the goods, but the goods must be available at the time of transfer that is at the time of execution of agreement of transfer of right to use the goods, the same must be available and deliverable and when they are not deliverable, question of right to use the goods would not arise. Therefore, if there is no deliverable goods in existence, there is no transfer of goods to the user at all. Thus, whether the goods are tangible or intangible, they must be deliverable. On the aforesaid premise, the apex court held the case of Stat....
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....e signal; that after entering into agreements and on obtaining requisite permission from various authorities, the customer sends the signals to the satellite at particular frequency allotted to him and the same is called "up-linking of signals". The signals so beamed from customer's ground station are amplified and sent back to the designated area called as "foot print" at the allotted receiver frequency and the same is called as "down linking"; that the set on board equipment that receives, amplifies and gives out the amplified signals are called "transponders". The configuration, control and the possession of the satellite always remain with "DOS" and it cannot be handled by the customers who do not have the high level of technical expertise; that the term "leasing" of transponders in the agreement with the customers is only to represent the allotment of a specific, fixed or dedicated bandwidth or range of frequencies for that particular customer at all times within the contractual period so as to ensure that there is an uninterrupted receipt of signals amplification and sending of the amplified signals to the customer. The control of transponder is always with the Department....
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....aka; that receiving and re-broadcasting of signals is facilitated by a set of equipment on board a satellite that receives, amplifies and gives out the amplified signals are called "transponders" in the satellite and each transponder is allotted a specific frequency range of operation and satellite is equipped with around 20 to 30 or more transponders along with suitably shaped receiving and transmitting antennas; that each of the transponders can be individually made active to respond to ground sent range of signal frequencies within the overall allocation of frequency and different type of communication methods called modulation schemes to implement the communication or information content delivery intended by the ground user and the total number of transponders represents the communication capacity of a satellite. That at present, more than 300 geostationary satellite have been placed in orbit and operated for different communication purposes by various countries across the world. The affidavit states details with regard to major systems of communication of satellite such as orbit injection and position maintenance system, electrical power system, altitude and orbit control s....
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....d leased out the facility to use the said transponders in the space segment capacity for which purpose the appellant received consideration from the customers and hence, the facility to use the transponders is a property and is commercial in nature and it is goods and therefore, it should be termed as "turnover" for the purpose of section 2(36) of the KVAT Act and that the transaction of lease of "facility to use the transponders" is a "deemed sale" for the purpose of section 2(29) of the KVAT Act. In response to the said notice, a reply dated November 9, 2008 was given wherein it is stated that the transponder is nothing but space in satellite and it is let out in mega hertz, say 32 mega hertz to customers in telecommunications or television satellites. Referring to the decisions in the case of Rashtriya Ispat Nigam Ltd. v. Commercial Tax Officer, Company Circle, Visakhapatnam [1990] 77 STC 182 (AP), Lakshmi Audio Visual Inc. v. Assistant Commissioner of Commercial Taxes [2001] 124 STC 426 (Karn), ISRO Satellite Centre, Department of Space, Bangalore v. Director of Income-tax, by the Authority for Advance Rulings (Income-tax) AAR No. 765 of 2007 dated October 22, 2008 [2008] 30....
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....ly, the notice of demand was issued to the appellant. The relevant decisions referred to in the proposition notice and reply have to be considered at this stage, in the light of the precedents in the case of Vikas Sales Corporation v. Commissioner of Commercial Taxes reported in [1996] 102 STC 106 (SC); [1996] 4 SCC 433, the question before the apex court was whether, the transfer of import licence called REP licence/Exim scrips by the holder to another person constituted a "sale of goods" within the meaning of the sales tax enactment for the purpose of levy of sales tax thereunder. The object behind issue of such licence was to provide to the registered exporters the facility of importing the essential inputs required for the manufacture of the products exported, in order to encourage exports and for that purpose, import licence called REP licences were issued equally to the prescribed percentage of the value of exports and such licences were transferable which require only a letter from the transferor recording and evidencing the transfer and on that basis, the transferee became the due and lawful holder of the licence and could either import the goods permitted thereunder or ....
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.... for providing audio/visual service for his programme or event. After assessing the need and availability of the equipment and suitable operator/technician to operate them on the specified dates, the petitioner accepts the order. The engagement is for short duration ranging from few hours to few days. (ii) The stores department of petitioner release the necessary equipment under a gate pass showing the name of the technician/ operator who will be incharge of such equipment, the mode of transport and the time, date and venue of the programme/event. (iii) The equipment is transported to the venue of the programme under the supervision of the petitioner's employee. At site the audio/ visual equipments are handled, arranged, installed and operated by petitioners' technicians/operators to meet the requirements of the programme/event. At no time the equipment is given to the possession or control of the customer, nor operated by the customer. (iv) After conclusion of the programme/event, the petitioner's technician/operator dismantles the equipment/system and brings them back to the petitioner's stores. (v) The entire risk in regard to the equipment during ....
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.... during the period it remained in his possession. In the second decision, a distinction was made between delivery of possession and mere custody without possession and while stating that when there is a delivery of possession, the effective control is with the customers and whereas in the latter case, it is lacking. In Bank of India v. Commercial Tax Officer, Central Section, Calcutta [1987] 67 STC 199 (Cal) and in the case of State Bank of India v. State of Andhra Pradesh [1988] 70 STC 215 (AP); MANU/AP/0163/1988, the Calcutta High Court and the Andhra Pradesh High Court considered the question as to whether leasing of a bank locker amounted to transfer of the right to use the locker and thus fell within the extended definition of "sale" and answered it in the negative. Similarly, in Modern Decorators v. Commercial Tax Officer [1990] 77 STC 470 (WBTT), it was held that business carried on by a decorator who constructed/erected pandals, barricades, rostrums, etc., and dismantled them by his own men and labour and taken back to its godown and hiring chairs, tables and furniture was held to be service rendered by the decorators, in so far as the erection of pandals, etc., was cons....
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....cceded to the request of the customer and thereby agreed to lease of 36 MHZ equivalent units of extended C band capacity as per article 1.1 with the following satellites: Satellite No. Bandwidth (MHz) Transponder No. INSAT 3A . . . . . . INSAT 3B 36 C No. 7-Cno. 13p INSAT 3C . . . . . . INSAT 3E Yet to be allotted . . . Article 1 of the said contract/agreement further states that, the customer shall have the option of augmenting the bandwidth during the service term by giving 3 (three) months prior notice to DOS. DOS shall allocate the additional bandwidth to the customer only from the next quarter on furnishing the necessary clearance from the competent authorities as per article 10C and upon payment of quarterly charges as per exhibit B to this agreement. The technical performance and other specifications are defined in exhibit A to this agreement (hereinafter "leased capacity"). Further it was agreed that "leased capacity" shall be a "pre-emptible service" in the event of any unforeseen technical contingencies, the Department of Space shall use its best efforts to provide alternate capacity at the earliest. Article 2, whi....
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....rth stations, which use the leased capacity. These earth stations shall be operated and maintained in accordance with the applicable provisions. The relevant copies of requisite clearances shall be forwarded to Anthrix. (e) For the purpose of ensuring that the transmission by the customer is within the acceptable levels of operating parameters, DOS may monitor the transmission of the leased capacity. Article 14, which deals with assignment, reads as under: "The customer shall not assign any of its rights or privileges or delegate any of its obligations, liabilities or duties hereunder without the prior written consent of DOS." Article 15, which pertains to sub-lease, reads as under: "The customer shall not sub-lease the leased capacity under this agreement without the prior written consent of DOS." On careful consideration of the terms and conditions of the agreement, what becomes clear is the subject-matter of agreement is in respect of lease of "space segment capacity" called "leased capacity" in various satellites with the customer who has an option of augmenting the band width during the term of lease by giving prior notice to Department of Space. The specifications....
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....e subject-matter of the agreement in a satellite which is a space segment capacity in a transponder of a satellite is, in our considered view, "goods" within the meaning of article 366(12) of the Constitution and therefore, the transaction in question is one which comes within the scope of sub-clause (d) of section 29A of article 366 of the Constitution, inasmuch as, there is a delivery of possession of the goods by the transferor (Department of Space) to the transferee (customer) and in law, the transferee has the effective control over the goods, i.e., "space segment capacity" in the transponder of satellite, though its technical operation is handled by the Department of Space. The facts in Lakshmi Audio Visual Inc. [2001] 124 STC 426 (Karn) are different from the present case and therefore the said decision is not applicable. In this context, the affidavit filed on behalf of the appellant in the context of "communication satellite" is relevant for the purpose of taking into consideration the fact that, the customer send signals to the satellites at a particular frequency allotted to him which is called "up-linking of signals" and the said signals are not just sent back but, t....
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....oyalty' within the meaning of article 13 of double taxation avoidance agreement and prevention of fiscal evasion with respect to taxes on income and capital gains consequent upon the treaty and section 9(1)(vi) of the Income-tax Act, 1961." On consideration of the nature of transaction, it was concluded that the substance of contract was the facility given through Department of Space for the utilization of "space segment capacity" of transponders from the satellite for transmitting the augmented data as to the position of an object on land, air or water so that the end user can have access to it through SBAS receiver who is thereby enabled to correct the errors in the GPS signal leading to significant improvement in position accuracy. The use of the capacity involved use of particular band width in the transponder meant exclusively for navigation purpose which is linked to the earth station (INLUS). The expression "Use of Space Segment Capacity" (USSC) of transponder has no reference to any operations performed by means of transponder. According to the authority, the use and operation of transponders as such was not at all contemplated under contract. What really happens is ....
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....e said ruling, a distinction has in fact made between "communication transponder" and "navigation transponder" and it is held that, the manner and object of use of two categories of transponders are different. In the case of "navigation transponder", the segment capacity of a transponder of a particular frequency is made available to a customer through INLUS (navigation land up-link station) which involves the use of a bandwidth operated by the customer and the said capacity will be utilised through the data command issued from the ground station, pursuant to which, the transponder transmits the signals or data so received from the ground station from geostationary orbit. According to the authority, a navigation transponder, which up-links and down-links data is a passive transponder unlike the communication transponder. In "navigation transponder", the substance of the contract is to give facility to customers for utilization of space segment capacity of the transponder to transmit the augmented data as to the position of an object on land, air or water so that the end user can have access to it through Satellite Based Augmentation System (SBAS) receiver. In fact, the Department o....
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....t during which period, the appellant herein or the Department of Space has no right to use the "space segment capacity" either for its own or to transfer the same to any other customers. Therefore, the transaction involved in this case is a "deemed sale" coming within the definition of "sale" under section 2(29)(d) of the KVAT Act. Accordingly, point No. 1 is answered against the appellant. Re. point No. (ii): As far as point No. (ii) is concerned, the contention of the learned counsel for the appellant is, section 6 of the Karnataka Value Added Tax Act, 2003, speaks about the place of sale of goods and that, in the instant case, where the "right to use the goods" and "transfer of right to use the goods" for any purpose has taken place outside the State, then, if only such goods are used within the State irrespective of the place shown in the contract of transfer of right to use the goods is made, then only such transaction would be covered under the scope of the Act. In the instant case, since the transfer of right to use the goods has not taken place within the State and since the goods are not used within the limits of State of Karnataka, the Act is not applicable to the tran....
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....d goods, at the time the contract of sale or purchase is made; and (b) In the case of unascertained or future goods, at the time of their appropriation to the contract of sale or purchase by the seller or by the purchaser, whether the assent of the other party is prior or subsequent to such appropriation. (2) Where there is a single contract of sale or purchase of goods situated at more places than one, the provisions of clause (a) shall apply as if there were separate contracts in respect of goods at each of such places. (3) Notwithstanding anything contained in the Sale of Goods Act, 1930 (Central Act 3 of 1930), for the purpose of this Act, the transfer of property of goods (whether as goods or in some other form) involved in the execution of a works contract shall be deemed to have taken place in the State, if the goods are within the State at the time of such transfer, irrespective of the place where the agreement for works contract is made, whether the assent of the other party is prior or subsequent to such transfer. (4) Notwithstanding anything contained in the Sale of Goods Act, 1930 (Central Act 3 of 1930), for the purpose of this Act, the transfer of the righ....
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....rtained goods at the time the contract of sale or purchase is made and (b) in the case of unascertained or future goods at the time of their appropriation through the contract of sale or purchase by the seller or by the purchaser whether the assent of the other party is prior or subsequent to such appropriation. Sub-section (1) of section 6 of the Act, therefore, covers a situation where the sale or transfer of the goods may take place outside the State but where the goods are within the State. Sub-section (2) of section 6 of the KVAT Act clarifies that even if by single contract of sale or purchase of the goods situated at one or more place, then they would be separate contracts in respect of goods of each of such places. Sub-sections (3) and (4) of section 6 of the KVAT Act begin with non obstante clause. According to section 6(3), as far as execution of works contract is concerned, notwithstanding anything contained under the Sale of Goods Act, 1930, if the goods are within the State, at the time of transfer, the transaction would be a "deemed sale" and even if the place where the agreement for works contract is made. Similarly, section 6(4) of the KVAT Act with regard to ....