TMI Blog2010 (2) TMI 1093X X X X Extracts X X X X X X X X Extracts X X X X ..... ustomer and the customer is given the right to use it in any manner as he deems fit. Of course, subject to terms of the lease agreement 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. Keeping in view the fiction which has been created in section 6 of the KVAT Act and the facts of the present case, since the agreement has been entered into within the State of Karnataka and at the time of agreement, i.e., "transfer of right to use the goods" was concluded, in the instant case, the goods namely, "space segment capacity of the transponder" in a satellite was available for transfer of right, section 6 of the Act does not hit the transaction in question. We reiterate that, the said provision enables different varieties of transaction to be brought within the scope of the KVAT Act and in our view, the same cannot curtail the present transaction fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as direct to home operators as per the satellite communications policy guidelines. The INSAT Satellites which belong to the Department of Space are placed in geo-stationary orbit around the earth contain slots called transponders which may be 20 to 30 on a single satellite having different frequency bands. According to the appellant, the Department of Space entered into a memorandum of understanding with it, with regard to contracts entered by the Department of Space with various customers for providing INSAT space segment capacity in the transponders attached to the satellite belonging to it. Under the said memorandum of understanding, the appellant provides marketing and contract services for hiring of transponders of INSAT satellites by providing users as per the existing satellite communication policy guidelines and the appellant is required to carry out certain activities on behalf of the Department of Space including billing of customers' collection of service tax and remittance, realization of payments against invoice raised on customers and providing of service support for marketing of INSAT/G-SAT space segment capacity both in local and global markets. Accor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ility to use the transponders in the space segment capacity and also passed an order levying penalty under section 72 of the Act and interest for the period in question. The said orders are produced as annexures H and J to the writ petitions. The appellant being aggrieved by the same challenged the correctness of the said order by way of filing writ petitions. The respondents filed the statement of objections by stating that the writ petitions were not maintainable as the petitioner was engaged in a commercial activity in the sale of space products like transponders, edu-sat equipment and carto-sat project and also engaged in providing foreign host facility for launching of space satellites on board PSLV launching vehicles and also track foreign satellites. According to the respondents, since the company is engaged in leasing of transponders band-width in INSAT satellites to customers who are allowed to up-link the INSAT transponders, it is a dealer and is registered under the provisions of the Act and in view of the definition of sale under the Act the appellant is liable to pay VAT tax on right to use transponders. That the dealer received charges in respect of leasing the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ls have been preferred. Pursuant to the order of the apex court these writ appeals have been heard finally. We have heard Sri V. Sridharan, learned counsel for the appellant, and learned Advocate-General, Sri Ashok Haranahalli for the respondents. It is submitted on behalf of the appellant that the nature of transaction between the appellant and the customers is such that there is no transfer of right to use the goods in the instant case as the satellites are owned by the Government of India and therefore, the transaction does not come within the scope of article 366(29A)(d) of the Constitution of India, as also section 2(29) of the KVAT Act and hence, the proposition notice issued by the respondents is ultra vires and not valid in the eye of law. He has also relied upon the decision of this court in Lakshmi Audio Visual Inc. v. Assistant Commissioner of Commercial Taxes reported in [2001] 124 STC 426 in support of his submission and has drawn our attention to two affidavits filed by experts in the field with regard to the nature of the transaction as well as a ruling of the Advance Ruling Authority in this regard. He has also contended that even if there is a transfer of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sides and on perusing the material on record, the following points would arise for our consideration: (i) Whether the first and second respondents were justified in concluding that, the allotment of space segment capacity in the transponders and bandwidth of a communication satellite having different frequency would amount to sale or purchase of goods within the meaning of article 366(29A)(d) of the Constitution of India as well as section 2(29)(d) of the KVAT Act? (ii) Whether the transaction in question does not come within the scope of section 6 of the Karnataka Value Added Tax Act, 2003? (iii) What order? Before answering point No. (i), on the basis of which the issues have to be considered, it is necessary to advert to the legal background at the outset. By the 46th Amendment made to the Constitution of India, article 366(29A) was amended to enlarge the scope of the expression sale or purchase of goods and amplified by means of fiction in law. The constitutional validity of the said amendment by which the Legislatures of the States were empowered to levy sales tax on certain transactions described in sub-clauses (a) to (f) of article 366(29A) of the Constitu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax. The apex court also held that the levy of sales tax after the 46th Amendment to the Constitution of India has to still comply with the restrictions imposed under articles 286 and 269 of the Constitution. In the case of 20th Century Finance Corpn. Ltd. v. State of Maharashtra [2000] 119 STC 182; [2000] 6 SCC 12 the apex court was considering the business of leasing equipment in the context of levy of sales tax and examined the question of situs of sale with regard to such transactions of deemed sale under sub-clauses (a) to (f) of clause (29A) of article 366 of the Constitution and after referring to certain decisions by a majority of 3:2 held that where situs of sale was not fixed or covered by any legal fiction created by the appropriate Legislature, location of sale would be the place where the property in goods passes. That it was the passing of the property within the State that was intended to be fastened on for the purpose of determining whether the sale was inside or outside the State. The question as to where the taxable event occurs on the transfer of right to use any goods was also considered in the said decision and held in the context the words transf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ght, the right to use does not arise. Therefore, it is the transfer, which is sine qua non for the right to use any goods. If the goods are available, the transfer of the right to use takes place when the contract in respect thereof is executed. As soon as the contract is executed, the right is vested in the lessee. Thus, the situs of taxable event of such a tax would be the transfer which legally transfers the right to use goods. In other words, if the goods are available irrespective of the fact where the goods are located and a written contract is entered into between the parties, the taxable event on such a deemed sale would be the execution of the contract for the transfer of right to use goods. But in case of an oral or implied transfer of the right to use goods it may be effected by the delivery of the goods. 28.. No authority of this court has been shown on behalf of respondents that there would be no completed transfer of right to use goods unless the goods are delivered. Thus, the delivery of goods cannot constitute a basis for levy of tax on the transfer of right to use any goods. We are, therefore, of the view that where the goods are in existence, the taxable event ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the KVAT Act and in the context of Explanation 3(d) to section 2(t), the apex court in the said judgment, held that the said Explanation was in excess of the legislative power under entry 54 of List II of the Seventh Schedule and accordingly directed that Explanation 3(d) to section 2(t) of the Karnataka Sales Tax Act, 1957 shall be read down to this effect that would not be applicable to the transactions of transfer of right to use any goods if such deemed sale is (i) an outside sale, (ii) sale in course of the import of the goods into or export of the goods out of the territory of India and (iii) an inter-State sale. In the case of Bharat Sanchar Nigam Ltd. v. Union of India [2006] 3 VST 95 (SC); [2006]145 STC 91 (SC), the question that came up for decision before the apex court, was with regard to the nature of the transaction by which mobile phone connections were obtained, as to whether, it is a sale or a service or both. In the said decision, after reiterating the legal history of article 366(29A) of the Constitution, the apex court held as follows (at pages 117 and 118 of 3 VST): 41. Clause (a) covers a situation where the consensual element is lacking. This normall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 (SC); [2006] 145 STC 91 (SC) reference has been made to the case of H. Anraj v. Government of Tamil Nadu [1986] 61 STC 165 (SC); [1986] 1 SCC 414 in which the question was whether the sale of lottery ticket was a sale of goods for the purpose of entry 54 of List II and Vikas Sales Corporation v. Commissioner of Commercial Taxes [1996] 102 STC 106 (SC); [1996] 4 SCC 433 as to whether REP licences/EXIM scrips were goods on the sale of which sales tax could be levied. The apex court in the first of the above cases held that the sale of lottery tickets confer on the purchaser two rights, viz., (i) the right to participate in the lottery draw and (ii) right to claim a prize contingent upon his being successful in the draw. It was held that the right to participate in a draw was goods for the purpose of levying sales tax. Similarly in Vikas Sales Corporation [1996] 102 STC 106 (SC); [1996] 4 SCC 433, REP licences were held to be goods for the purpose of sales tax. Both the above decisions were doubted in Sunrise Associates v. Govt. of NCT of Delhi [2000] 10 SCC 420. Since there was no concrete view taken at the time of rendering the decision in Bharat Sanchar Nigam Ltd.'s ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cement in future. Therefore, it was held that electromagnetic wave or radio frequency does not fulfil the parameters applied by the Supreme Court in Tata Consultancy [2004] 137 STC 620 (SC); [2005] 1 SCC 308 for determining whether it is goods, right to use of which, would be a sale for the purpose of article 366(29A)(d). In the said decision, by way of a concurring the judgment his Lordship Dr. Ar. Lakshmanan J., stated that to constitute a transaction the transfer of right to use the goods the transaction must have the following attributes: (a) there must be goods available for delivery; (b) there must be a consensus ad idem as to the identity of the goods; (c) the transferee should have a legal right to use the goods consequently all legal consequences of such use including any permissions or licences required therefor should be available to the transferee; (d) for the period during which the transferee has such legal right, it has to be the exclusion to the transferor this is the necessary concomitant of the plain language of the statute, viz., a 'transfer of the right to use' and not merely a licence to use the goods; (e) having transferred the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SIM card merely represented a means of access and identified the subscribers and it was held that what a SIM card represents is ultimately a question of fact. Thus, what emerges from the aforesaid decisions is the fact that the 46th Amendment to the Constitution of India has enlarged the scope of the definition of sale and while considering the same under article 366(29A) of the Constitution in 20th Century Finance Corpn. Ltd. [2000] 119 STC 182 (SC); [2000] 6 SCC 12, it was held that in case of sub-clause (d) of clause (29A) of article 366, goods are not required to be left with the transferee but all that is required is that there is a transfer of right to use the goods and that the location of deemed sale be under clause (d) the place where the right to use the goods is transferred, but the place where the goods are situated is of no relevance to the location of deemed sale. Therefore, transfer is sine qua non for the right to use any goods and when the contract is executed, the right is vested in the lessee under clause (d). Hence, the taxable event on such a deemed sale would be the execution of the contract for transfer of right to use the goods. In the case o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ehalf of the appellant in the instant case. By an affidavit dated June 11, 2009, the director of business development of the appellant-company has stated that, the Department of Space ( DOS , for short) is the owner of various satellites which are of two types, namely, communication satellites and remote sensing satellites ; that a communication satellite (SATCOM) is an artificial satellite stationed in space for the purpose of telecommunication; that modern communication satellites are launched in a variety of orbits called Geosationary orbits, molniya orbits, elliptical orbits, etc., and that geo synchronous orbit over the equator represents the orbital path that is located at a distance 36000 kms. away from the earth; that a geostationary satellite revolves around the earth at a speed of 3.75 kms. per second in its orbit to be in synchronization with the earth's rotation so that the satellite would appear to be in a fixed position over a certain longitude to an earth based observer; that the communication satellites are made up of many systems consisting of various complex equipment various forces, such as the Sun's gravity, earth's gravity and that the te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ners for obtaining the requisite frequency which could be given to the customers in India; that, at times, the appellant also allots the excess bandwidth to foreign customers. The remote sensing satellites are used for acquisition of information of an object or area and the data so collected is used for various applications such as water resource monitoring, coastal studies, crop related studies and mineral resource monitoring; that the appellants allow various Government Departments, Defence Department and foreign companies to access the date sent by the satellite and download such data or imagery and such customers including the foreign customers are required to pay access fees and royalty fee when it is given for use to others. Even in case of remote sensing satellite, the appellant and the customers enter into an agreement and the customers have only access to the required data/imagery in the satellite and no control and possession of the satellite is given to the customers. By another affidavit dated June 15, 2009, functioning of the communication satellites has been explained in the following terms: (i) Pick up signals sent in a range of frequencies from the ground. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t from its launch until the end of its life of the satellite. That in so far as the remote sensing satellite is concerned, the customers are required to enter into an agreement in respect of remote sensing satellite as per the requirement of all the cameras in the satellite which are used only for collection of data/imageries by the satellite and that the access fee is calculated based on the number of cameras used and the time for which it is used for the particular customers. Apart form this, the appellant also collects royalty from the foreign customers who give the data so downloaded by them to the others for use and such customers will have exclusive right to use the data and give it to others for use within the customer's national boundaries and the royalty so collected is based on the declaration made by such customers for the use of copyright of the appellant; that in the case of remote sensing satellite, the appellant has entire control and possession and the customers only download the required data and imagery in the satellite and no control and possession of the satellite is given to the customers. Yet in another affidavit dated June 15, 2009 filed by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er does not come within the scope of provisions of section 6(4) of the KVAT Act, 2003, as the satellite or the transponders are located in the geostationary orbit outside the territory of India and therefore, the question of levy of tax by the State does not arise; that taxability of access fees and royalties received by the appellant was also not taxable. The sum and substances of the reply was that since there was no transfer of property or goods from the appellant to the customers, the question of levying sales tax did not arise; that there was no deemed sale in the instant case. By a further reply dated December 13, 2008, it was stated that there was no effective control and possession of the transponders which was transferred to the customers and, therefore, the proposition notice dated October 16, 2008 has to be dropped. Annexure H is the order of reassessment wherein it is stated that, the agreement for the lease of INSAT space segment capacity for VSAT operations (extended C band) executed between the Department of Space and the Stock Exchange, Mumbai is considered and it is concluded that the dealer has leased out the facility to use the transponder in the space segment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thority proceeded to subject such sales to sales tax, whereas the assessee contended that the licences or scrips do not constitute goods within the meaning of relevant sales tax enactments and therefore, they cannot be assessed to sale tax. By then, this court, in the case of Bharat Fritz Werner Ltd. v. Commissioner of Commercial Taxes [1992] 86 STC 170 (Karn) held that, transfer of REP licences are goods within the meaning of the Sales Tax Act and premium or price received by the transferor thereof is liable to sales tax thereunder. The Madras High Court, also took a similar view. On appeal, before the apex court, it was contended that, such transactions do not come within the definition of goods in the relevant enactment and therefore, cannot be subjected to sales tax. The apex court, after analysing the definition of goods in various sales tax enactments, General Clauses Act, 1892, Sale of Goods Act, 1930, Black Law Dictionary with regard to the expression of property and on going through the transferability of REP, licences and by placing reliance on the decision in the case of H. Anraj v. Government of Tamil Nadu [1986] 61 STC 165 (SC); [1986] 1 SCC 414 which dealt wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in advance or after the programme, as per the agreed rates for all the services, without any bifurcation. The assessee therein had contended that he is not a dealer within the meaning/expression of the Karnataka Sales Tax Act, 1957 and he filed a petition for quashing the notice issued under section 12(3) of the said Act and seeking a direction to the authorities not to proceed further in pursuance of the said notice issued to them. In the said decision it is stated that transfer of right to use any goods as sine qua non are leviable to tax under the sales tax enactment. It is further held that: The transfer of the right to use the goods , which may be by way of leasing, letting or hiring, involves the transferor permitting the transferee (lessee/hirer) to use his goods. To constitute such transfer, there should be delivery of possession of the goods by the transferor to the transferee, that is transfer of the effective and general control of the goods from the transferor to the transferee. But such transfer need not be a legal transfer of the goods nor have all trappings of a lease . The question whether there is such transfer or not is essentially a question of fact wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le as amended. On the basis of the aforesaid decision, it was held as follows: Thus if the transaction is one of leasing/hiring/letting simpliciter under which the possession of the goods, i.e., effective and general control of the goods is to be given to the customer and the customer has the freedom and choice of selecting the manner, time and nature of use and enjoyment, though within the frame work of the agreement, then it would be a transfer of the right to use the goods and fall under the extended definition of 'sale'. On the other hand, if the customer entrusts to the assessee the work of achieving a certain desired result and that involves the use of goods belonging to the assessee and rendering of several other services and the goods used by the assessee to achieve the desired result continue to be in the effective and general control of the assessee, then the transaction will not be a transfer of the right to use goods, falling within the extended definition of 'sale'. With regard to hiring of audio-visual and multimedia equipment, in the light of the aforesaid principles, it was held that the transaction was not a transfer and the use of the good ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2, which deals with the period of lease, reads thus: (a) DOS shall make the leased capacity available to the customer on a 24 hours, seven-day-per-week basis for the period of lease set forth in sub-paragraphs (b) and (c) below ('period of lease'). (b) The period of lease shall commence on July 1, 2003. (c) The period of lease shall terminate on March 31, 2006. Article 3 deals with interruption in the provision of leased capacity during the duration of lease. Article 6 deals with termination or surrender by the customers or by the Department of Space, clause A and clause D of article 6 reads thus: A. Termination or surrender by customer: (i) The customer may terminate for its convenience, the leased capacity at any time after the date of this agreement by giving at least three (3) months written notice to DOS. In the notice, the customer shall specify the effective date of termination ('ETD'). (ii) The customer may surrender part of the leased capacity at any time after the date of this agreement by giving at least three months written notice to DOS. In the notice, the customer shall specify the effective date of surrender ('BSD'). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cations of the leased capacity are given in exhibit A to the agreement. The leased capacity is to be made available to the customers on a 24 hours or seven days week basis for the period of lease. If there is any interruption in the provision of leased capacity, then subject to articles 3 and 9, the Department of Space has to make good the said interruption. Article 6 speaks of termination or surrender of leased capacity. The fact that a customer may surrender a part of the leased capacity at any time clearly implies that when the leased capacity is given to the customer, it is in the customers' control. But by such control, we do not mean that it is technical control of the leased capacity in the satellite, but we mean legal control . In fact, sub-clause (D) of article 6 clearly stipulates that upon termination of agreement either by the customer or by the Department of Space or in the event of surrender of part of the leased capacity by the customers or at the end of completion of lease to use the leased capacity so terminated the leased capacity, shall revert back to the Department of Space unconditionally. This again implies that during the currency of agreement, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the set on board equipment which receives the signals from the transponder of satellite amplifies the said signals electronically and then re-transmit them back to earth on a different set of frequencies and in the direction desired. Though the operation of the satellite may be under control of the Department of Space, yet the leased capacity in the transponder of the satellite is dedicated to a particular customer, who can use it at any time of the day on any day of the week and that said leased capacity is given to a particular customer and the same cannot be handed over or transferred to any other customer. Therefore, it cannot be said that there is no delivery of possession of the leased capacity to the customer and hence, there is no transfer of right to use the goods . Further, the satellite, in the instant case, is communication satellite unlike remote sensing satellite which is used for acquisition of date information or imageries, which would be downloaded by the respective customers for which an access fee is collected as well as royalty and the same is paid to the Department of Space by the customers. In the Ruling of the Authority for Advance Rulings (Inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s that augmented data sent by the earth station, INLUS reaches the transponders and it transmit back to the earth and the same is accessed by SBAS user receiver in the coverage area. The Department of Space clarified that transponder did not perform any operation with reference to the data up-linked and down-linked and there is no on board data storage . It was also contended that by use of equipment, i.e., transponder by the applicant therein, he did not operate the same and had no control over the equipment and use of the equipment connotes that the grant of right has possession and control over the equipment and the equipment is virtually at its disposal, but there is nothing in any part of the agreement which could lead reasonable inference that possession or control had been given to the applicant under the terms of the agreement, in the course of operating facility. Placing reliance on its previous ruling rendered in Dell International Pvt. Limited's case, wherein a two way telecom bandwidth was provided to the applicant DEL by means of dedicated private line circuit through network of service provider, it was noticed that the case under consideration, existing space ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pace has clarified in the said ruling that, navigation transponder does not perform any operation with reference to the data up-link and downlink and there is no on board data storage . The data sent by the customers does not undergo any change or improvement through the transponder. Thus, the navigation transponder is unlike communication transponder not an active transponder in the sense, it does not respond in any way to the date up-linked, though the customer does not operate the transponder data, but it gets access to the navigation transponder through his own network/apparatus and therefore, the data received by him does not undergo any change or improvements through the media of transponder, inasmuch as, the data is amplified and send back to the designated area at the allotted receiver frequency which is called as down-link. However, in a communication transponder , after receiving the signals from the ground station at one frequency, it transmits them to another ground station at another frequency. For the operation, there is a need of particular data to reach the transponder. In such circumstances, the use of transponder is ensured when it responds to the dire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion in question. Sri Ashok Harnahalli, learned Advocate-General, has stated that the agreement, namely, the lease agreement has been executed in Karnataka State and therefore, the restriction section 6(4) of the KVAT Act is not applicable to the facts of the present case, as the said section applies to those transactions which are entered into outside the State, subject to terms and conditions mentioned in the said section and the intention of the Legislature is to enlarge the scope of sale by means of a fiction. Therefore, he submits that the contention of the learned counsel for the appellant that in the instant case, although the agreement has been entered into in the State, since the goods are not within the State, inasmuch as, the right to use the goods is use of space segment capacity of the transponder of the satellite which is located thousands of kms away cannot be accepted, as the said section would be applicable only where the transaction is not entered into within the State of Karnataka. Since in the instant case, the transfer of right to use the goods has taken place within the State of Karnataka, no reliance can be placed on section 6(4) of the Act is the subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o use any goods for any purpose (whether or not for a specified period) shall be deemed to have taken place in the State, if such goods are for use within the State irrespective of the place where the contract of transfer of the right to use the goods is made. The said section has to be read in the context of section 3 and section 7 of the KVAT Act which is charging section and deals with time and sale of goods, respectively, and the same reads as follows: 3. Levy of tax. (1) The tax shall be levied on every sale of goods in the State by a registered dealer or a dealer liable to be registered, in accordance with the provisions of this Act. (2) The tax shall be levied, and paid by every registered dealer or a dealer liable to be registered, on the sale of taxable goods to him, for use in the course of his business, by a person who is not registered under this Act. 7.. Time of sale of goods. (1) Notwithstanding anything contained in the Sale of Goods Act, 1930 (Central Act 3 of 1930), for the purpose of this Act, and subject to sub-section (2), the sale of goods shall be deemed to have taken place at the time of transfer of title or possession or incorporation of the go ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsfer of right to use any goods for any purpose, notwithstanding anything contained in the Sale of Goods Act, 1930, and irrespective of the place where the contract of the right to use the goods is made, the transaction would be a deemed sale , if such goods are used within the State. Section 6 of the Act is an enabling provision which has the purpose of enlarging the scope of the definition of sale within the State irrespective of the place where the contract of sale or purchase or transfer of the right to use any goods for any purpose takes place outside the State. In the present case, we are concerned with only transfer of the right to use any goods for any purpose as contemplated under section 6(4) of the Act. After giving our anxious consideration to the above submissions, we see considerable force in the said submission of the learned Advocate-General and consequently, we hold that section 6 of the KVAT Act particularly, sub-section (4) cannot come in the way of holding that the agreement entered into between the appellant and the Department of Space in the present case is outside the scope of provisions of section 6 of the Act. So long as the sale is not in the course ..... X X X X Extracts X X X X X X X X Extracts X X X X
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