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TMI Blog2011 (9) TMI 216X X X X Extracts X X X X X X X X Extracts X X X X ..... bsp; Sri R.S. Murthy JUDGEMENT Per: Ramesh Ranganathan: 1. Declaration of the law by the Supreme Court, in Bharat Sanchar Nigam Ltd v. Union of India (2006) 3 SCC 1), notwithstanding, we are now called upon, in this batch of Writ Petitions, to adjudicate on the jurisdiction of the revisional/appellate/assessing authorities to levy tax under Section 4(1) and (8) of the A.P. VAT Act, 2005 (hereinafter referred to as the Act) on SIM cards - pre-paid and post-paid; recharge coupons; value added services; telephone instruments, mobile handsets, modems and caller ID instruments; mobile telephone rentals; sharing of infrastructure; non-refundable deposits; refundable deposits etc. 2. T.R.C. Nos.53 of 2007 and batch are preferred by the State of Andhra Pradesh against the orders of the Sales Tax Appellate Tribunal, Hyderabad (hereinafter called "STAT") holding that telephone instruments were merely end devices of the system; there was no material to show that rental charges were levied for use of handsets; and no finding could be given on the questions (1) whether handsets and telephone instruments were different goods or were one and the same; or (2) whether mobile cell phones alone c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are intended to identify the phone's owner and the service provider. System Identification Code (SID) is a unique 5-digit number that is assigned to each carrier by the licensor. Electronic Serial Number (ESN) is a unique 32-bit number programmed into the phone when it is manufactured. A Mobile Identification Number (MIN) is a 10-digit number derived from the cell phone number given to a subscriber. The SID, on the control channel, is a special frequency used by the phone and the base station. Along with the SID the mobile handset also transmits a registration request and the MTSO, which keeps track of the phone's location in a database, knows which cell phone is being used. When the MTSO gets a call, intended for one cell phone, it looks up the database and diverts the call to that cell phone picking up the frequency pair used by the receiver cell phone. When a cell phone is used the central antenna/central transmitter at the MTSO and the transmitters in other areas are co-ordinated with the cell phone in a fraction of a second. All this is made possible by a computer which simultaneously receives, analyses and distributes data by sending and receiving radio/electro-magnetic signa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he hands of the petitioner, and a reasonable profit thereon, can alone be brought to tax under the Act. 7. On the other hand it is contended on behalf of the revenue that, while the SIM card enables access to the cellular network, it can also store data of phone calls, contact numbers, games, music etc; it is capable of being bought and sold; it has utility; it is capable of being transferred, delivered and stored; SIM cards have all the attributes of "goods", and can be subjected to "sale"; pre-paid SIM cards are sold to customers, through distributors, for a price; the charges collected from the subscriber are for the SIM card; they are not collected for the service of activating the SIM card; SIM cards are not activated at the time of their sale to the distributors; and the amounts collected for issue of prepaid SIM cards, and rentals for postpaid SIM cards, represent the consideration for "sale" and "deemed sale" respectively. 8. It is essential, at the outset, to understand what a SIM card represents. A Subscriber Identification Module (SIM) card contains a computer chip with pre-recorded instructions. It is a device which helps the service provider identify the subscriber. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CR 379). What are "goods" in a sales transaction remains, primarily, a matter of contract and intention. The seller and the purchaser would have to be ad idem as to the subject-matter of sale or purchase. The Court would have to arrive at the conclusion as to what the parties had intended, when they entered into a particular transaction of sale, as being the subject-matter of sale or purchase. In arriving at a conclusion the Court would have to approach the matter from the point of view of a reasonable person of average intelligence. (Bharat Sanchar Nigam Ltd. (2006) 3 SCC 1). It is only if the parties to the agreement intend to sell and buy the "SIM" card for what it is, and not what it is intended for, can it be said that "SIM " cards are the "goods" which are the subject matter of sale. If the intention of the parties, as envisaged in the agreement, is to buy and sell the SIM card per se, and not for activating the subscribers mobile telephone and thereby connect it to the service provider's network, the SIM cards would constitute "goods" which are the subject matter of "sale". 11. It would not suffice merely to hold that SIM cards are "goods" for the purpose of its being charg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld have to qualify as "sales", within the meaning of the Sale of Goods Act, 1930, for the purpose of levy of sales tax. (Bharat Sanchar Nigam Ltd. (2006) 3 SCC 1). For the tax to amount to a tax on the sale of goods, it must amount to a "sale" according to the established concept of "sale" in the Law of Contract or the Sale of Goods Act, 1930. The Legislature cannot enlarge the definition of "sale" so as to bring within the ambit of taxation transactions which cannot be a "sale" in law. (T.N. Kalyana Mandapam Association v. Union of India (2004) 5 SCC 632. If there is an instrument of contract which is composite in form, in any case other than the exceptions in Article 366(29-A), then, unless the transaction represents two distinct and separate contracts and is discernible as such, the States would not have the power to separate the " agreement to sell " from the "agreement to render service" and impose tax on the "sale". The test for composite contracts, other than those mentioned in Article 366(29-A), continues to be: Did the parties have in mind or intend separate rights arising out of the sale of goods, If there is no such intention there is no "sale" even if the contract can b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me restrictions and conditions. (Builders' Assn. of India v. Union of India (1989) 2 SCC 645). The said definition, as to deemed sales, will have to be read in every provision of the Constitution wherever the phrase "tax on sale or purchase of goods" occurs. (Bharat Sanchar Nigam Ltd. (2006) 3 SCC 1). As the intention of the parties to the agreement in these batch of Writ Petitions, (i.e., the agreement between the service provider and the subscriber), is not to sell or buy a SIM card for what it is, but to use it to activate the subscribers mobile telephone and connect it to the service providers network, the SIM cards do not constitute "goods" and the amount collected for issuing a post paid SIM card does not represent the consideration for the transfer of the right to use the SIM card. The service, of activating the subscribers cellular phone, cannot be treated as "deemed sales" under Article 366(29-A)(d) of the Constitution of India or brought to tax under Section 4(8) of the Act. While the States have the legislative competence to levy tax on sales if the necessary concomitant of a"sale" is present in the transaction, and the "sale" is distinctly discernible therein, they are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1, that the value of the SIM card forms part of the activation charges, service tax can alone be levied for such services, and not sales tax, the revisional/appellate/ assessing authorities have exceeded their jurisdiction in levying tax on pre-paid and post-paid SIM cards. RECHARGE COUPONS/VOUCHERS : 17. It is urged on behalf of the petitioners-service providers that recharge coupons/vouchers are for extension of talk time/validity of the connection; they are also incidental and integral to telecommunication service; the recharge coupon does not, by itself, constitute "goods" and is not the subject matter of sale or purchase; the agreement between the subscriber and the service provider is for extension of talktime/validity period of the connection for extra consideration; this transaction itself is not sale of goods, but only a facet of "telecommunication service"; the recharge coupons are evidence of advance payment of consideration for receipt of services in the future; the recharge coupons do not have utility or value of their own; the benefits arising out of a contract can never be property; a recharge coupon is the benefit arising out of a contract and cannot, therefore, b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bound books, centre pinned books, hard case books, computer stationery, posters, Brochures, CD/DVD Covers, visual aids, danglers, streamers, envelopes, labels, telephone, recharge coupons, report cards, Tickets, Cheque Books, Demand Drafts, Coupons and all kinds and classes of forms including tender and bid documents and similar printed materials." 20. A recharge coupon is a memorandum on a small card or piece of paper containing certain digital arrangements or a number or a PIN. It is merely an operational instruction given by the service provider to the subscriber to enable him to extend his talktime/validity of the connection period. The purpose for which recharge coupons are issued is that the number printed on it is used to access the network of the service provider. Except for this purpose and use, the recharge coupon has no other utility. The subscriber, after purchasing the recharge coupon, scratches the silver/black panel to view an 18 digit secret code, then dials a particular number from his cell phone, and enters the 18 digit secret code. This provides him access to the network of the service provider. As soon as the secret code is entered through the cell phone, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld that recharge coupons are not liable to tax under the Act, it matters little that the supply of recharge coupon is routed by the service provider through several distributors before it reaches the subscriber. 23. Entry 47 of Schedule (iv) to the Act, as amended retrospectively with effect from 18.11.2005, includes "coupons" and "cheque books". If, for example, a cheque leaf which costs Rs.2/- to print is used to draw Rs.1.00 lakh from the bank, it would defy reason if the "cheque" is treated as "goods", its sale value as Rs.1.00 lakh, and is brought to tax as"sale" under the Act. Likewise the recharge coupons which may have costed the service provider less than Re.1 to have it printed, cannot be brought to tax for the value mentioned therein which may range from Rs.10/- to several thousand rupees. What Entry 47 of Schedule IV represents is sale of the recharge voucher, to the service provider, and not the transaction between the service provider and the subscriber even if, in the process, the recharge coupons are routed through various distributors and retailers. Supply of "Recharge coupons" by the service provider to the subscriber falls within the ambit of "telecommunication ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch monthly rentals cannot be subjected to tax under the Act. The impugned orders passed by the revisional/appellate/assessing authorities, levying tax on monthly rental collected for post paid SIM cards, is without jurisdiction and is illegal. VALUE ADDED SERVICES : 27. It is the case of the petitioners-service providers that SIM/RUIM card based connections, CDMA or WILL or any other kind of connections/extensions/talk time/validity period, RCVs, EVDs, VAS etc., are all services, rendered by the service provider to their subscriber, integral or incidental to "telecommunication service"; software, in value added services, is transferred only telegraphically/telephonically by the use of, and by means of, a telegraph line/telephone connection; value added services involve transmission and receipt of messages i.e., textual, audio and visual data, and are ultimately a form of communication under Entry 31 List I of the VII Schedule read with Section 3(3) of the Indian Telegraph Act; incorporation of the software in a physical medium used for marketing is the sine qua non, and a pre condition, for the transformation of software from a purely intellectual content into "goods"; the "soft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lue of their own; the amount received, for value added services, is the sale proceeds received for downloading of songs, games etc.; the proceeds received from value added services are towards supply of software; "software" are "goods"; the service provider sells these software products through his mobile network; they are sold online; this constitutes sale of products liable to tax as intangible software applications; and the supply of the software of value added services, and installation charges received, are taxable under Entry 2 of the IV Schedule to the Act. 29. The words "message", "telegraph" and "telegraph line" are defined in the Indian Telegraph Act, 1885. 'Message' is defined therein to mean any communication sent by telegraph, or given to a telegraph officer to be sent by telegraph or to be delivered. "Telegraph" is defined to mean any appliance, instrument, material or apparatus used or capable of use for transmission or reception of signs, signals, writing, images, and sounds or intelligence of any nature by wire, visual or other electro-magnetic emissions, radio waves or hertzian waves, galvanic, electric or magnetic means. 'Telegraph line' is defined to mean a wir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al, or other electro-magnetic means. 30. Section 65(109a) of the Finance Act, 1994 defines "telecommunication service" to mean service provided by means of any transmission, emission or reception of signs, signals, writing, images and sounds or intelligence or information of any nature by wire, radio, optical, visual or other electro-magnetic means or systems and to include voice mail, data services, audio tax services, video tax services, fixed telephone services, cellular mobile telephone services, carrier services, and provision of call management services. Section 65(105)(xxxx) defines "taxable service" to mean any service provided, or to be provided, to any person in relation to telecommunication service. Section 65 (36c) defines "development and supply of content" to include development and supply of mobile value added services, music, movie clips, ring tones, wall paper, mobile games, data, whether or not aggregated, information, news and animation films. Section 65(105)(zzzzb) defines "taxable service" to mean service provided or to be provided to any person, by any other person in relation to development and supply of content for use in telecommunication services. 31. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ambit of "telecommunication services" as defined in Section 2(k) of the TRAI Act and Section 65(109a) of the Finance Act, 1994. Ringtones, music downloads, wall paper, music clips etc., fall within the definition of "development and supply of content" under Section 65 (36c) and constitute "taxable service" under Section 65(105)(zzzb) of the Finance Act, 1994. 34. Even otherwise it is only if "value added services" such as ring tones, wall papers, games etc., constitute "goods" can their sale/deemed sale be brought to tax under the Act. Section 2(7) of the Sale of Goods Act, 1930 defines "goods" to mean every kind of moveable property other than actionable claims and money, and to include stock and shares, growing crops, grass, and things attached to or forming part of the land which are agreed to be severed before sale, or under the contract of sale. The definition of "goods" under the Sale of Goods Act is similar to the definition of "goods" under Section 2(16) of the Act. The term "goods", as used in Article 366 (12) of the Constitution of India, includes "all materials, commodities and articles", and is very wide. It includes all types of movable properties, whether those prop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arat Sanchar Nigam Ltd. (2006) 3 SCC 1); David Gilles & Roger Marshal: Telecommunications Law : Butterworths). The transfer of software to the subscriber or to his mobile instrument takes place only telegraphically by the use and by means of a telegraph line/electro-magnetic waves. The transfer does not take place by means of downloading the software from a physical medium (i.e., floppy, disk etc.,) provided by the service provider, into the subscriber's instrument. All value added services involve transmission and receipt of messages i.e., textual, audio & visual data. The service providers carry messages. They are only carriers, and do not have property over the message they carry. This method of carriage of the message is carriage of goods, and not a transfer of the right to use goods, if any. (Bharat Sanchar Nigam Ltd. (2006) 3 SCC 1). Transmission of messages, by the service provider to the subscriber, is by means of Electro-magnetic waves. A subscriber to a telephone service cannot, reasonably, be taken to have intended to purchase or obtain any right to use electromagnetic waves or radio frequencies when a telephone connection is given. Nor does the subscriber intend to use ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... They are merely messages carried by means of Electro-magnetic waves. Both " Software " which is not recorded on a physical medium before it is marketed, and " Electro-magnetic waves " through which audio and visual messages/signals are transmitted, are not "goods" liable to tax under the Act. Levy of tax on value added services, either under Section 4(1) or 4(8) of the Act, by the revisional/appellate/assessing authorities concerned is without jurisdiction and is illegal. SHARING OF INFRASTRUCTURE : 36. Counsel for the petitioners submit that the service providers enter into agreements with various other service providers for use by them of various kinds of infrastructure; there is no transfer of the right to use the equipment; there is no deemed sale under Article 366(29A); the towers are permanent industrial structures and constitute "immovable property"; and, as they are not "goods", no tax can be levied on them under the Act. 37. On the other hand it is the case of the respondent-State Government that other service providers are also allowed space on the tower of the owner service provider on a non-exclusive basis; the space provided to them is a pre-identified place on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with a height of upto 90 metres. Antennas are fixed on the tower to receive and transmit messages. On a reciprocal basis, other service providers are permitted to fix their antennas on the tower, and share the infrastructure namely the other equipment, against monthly payment described as "Infrastructure Share Fee". Other cellular operators are permitted to bring their own equipment, like BTS, access radio etc., and station such equipment at the site. Each site has a minimum lock in period of 3 years. Apart from the antenna fixed on the tower by the beneficiary party, the entire infrastructure is under the control, possession and maintenance of the passive service provider. 40. The service provider, who erects the tower and locates various equipment thereat, is called the PASSIVE INFRASTRUCTURE SERVICE PROVIDER. Under the 'infrastructure sharing agreement' entered into with various other cellular operators, the PASSIVE INFRASTRUCTURE SERVICE PROVIDER shares its infrastructure i.e., tower sites (along with identified assets thereat like room shelter, air conditioning equipment, diesel generator, electrical wiring, power plant, etc) and generates revenue from its infrastructure. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the earth, as in the case of walls or buildings; or (c) attached to what is so imbedded for the permanent beneficial enjoyment of that to which it is attached. The question whether a chattel is imbedded in the earth so as to become "immovable property" is to be decided on the principles of annexation to the land. The twin tests are the degree or mode of annexation, and the object of annexation. (Solid and Correct Engineering Works v. CCE (2010) 5 SCC 122. From a combined reading of the definition of "immovable property", in Section 3 of the Transfer of Property Act and Section 3(26) of the General Clauses Act, it is evident that, in an immovable property, there is no mobility. The test of permanency is whether the chattel is movable to another place of use in the same position, or is liable to be dismantled and re-erected at the latter place? If the answer is yes to the former it must be a movable property and, thereby, it must be held that it is not attached to the earth. If the answer is yes to the latter, it is attached to the earth. (T.T.G. Industries Ltd. V. CCE (2004) 4 SCC 751 Ad Age Outdoor Advertising Private Limited, Hyderabad v. The Government of Andhra Pradesh Judgment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would not constitute "deemed sales" either under Article 366 (29A)(d) of the Constitution of India or under Explanation IV to Section 2(28) of the Act. Such sharing of infrastructure is incidental to, and a means of, rendition of "telecommunication service". The impugned orders passed by the revisional/appellate/assessing authorities, levying tax on the proceeds received by the passive service provider on sharing their infrastructure equipment with other service providers, treating it as "sale" under Explanation (iv) to sub-section (2) of Section 28 of the Act, is without jurisdiction and is illegal. TELEPHONE INSTRUMENTS, MODEMS AND MOBILE HANDSETS : 45. It is contended on behalf of the petitioners that telephone instruments are not sold; they are provided to customers free of charge as a part of the end equipment, and no charges are collected for the instruments; customers have the option to have their own instruments, in which case they are allowed rebate in installation charges; the fixed monthly charges payable by customers, having either their own instrument or the instrument provided to them, are the same; the telephone instruments are to be surrendered by the customer on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat may have been purchased for the purposes of getting a telephone connection. That, and any other accessory supplied by the service provider, alone remain to be taxed under the State sales tax laws. (Bharat Sanchar Nigam Ltd. (2006) 3 SCC 1) Modems are necessary to avail access to the broad band service. Modems are provided to customers who are given the option of paying either fixed monthly charges or the full cost of the modem. Telephone instruments, mobile handsets and modems are "goods". If the service provider has sold these goods to the subscriber, then such "sale" is liable to tax under Section 4(1) of the Act. If, on the other hand, the service provider has supplied telephone instruments, mobile handsets, and modems to the subscriber for their use, it would then amount to a transfer of the right to use these "goods" both under Article 366(29A)(d) of the Constitution of India and under Section 4(8) of the Act, as such supply results in a transfer of the right to use these "goods" by the subscribers. While the title in the goods, in such cases, may remain with the service provider yet, by fiction of law, it is treated as "sales" as effective control and possession of these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g caller ID instrument, and are included in the monthly bills; leased line circuits are made available to the customers on their specific request; these lines are distinct and different from the usual land lines; rentals are collected only for the service provided to the customer; and applicable service tax is also collected from them. 51. On the other hand it is the case of the Revenue that the petitioners have installed such caller identity equipment fitted to land-lines wherever the customer has so requested; they have been collecting rental charges for the same; such amounts charged, in respect of sales and on account of rentals on such caller identity equipment, constitute "goods" and are taxable under the Act. 52. The Calling Line Identification Presentation (CLIP) facility was introduced w.e.f. 1.1.99. The device or instrument, for availing CLIP facility, is the Caller I.D. instrument. The Caller ID instrument, procured by the subscriber and connected to the landline telephone instrument, identifies the telephone number of the caller. Caller I.D. equipment is either procured from the petitioners, or from other Vendors, at the customer's option, and are utilized by him. 53 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cards and Recharge coupons, then such deposits cannot be brought to tax either under Section 4(1) or Section 4(8) of the Act as neither SIM cards nor Recharge coupons, or for that matter "non-refundable deposits" constitute "goods" nor is there any"sale" thereof. If however, as is contended by the Revenue, non-refundable deposits are received against supply of telephone instruments, batteries, accumulators etc., (which are "goods") then they may well be a form of disguised consideration for the"sale" or the "transfer of the right to use goods" and, as such, liable to tax under the Act. 57. The questions which fall for consideration is what is the purpose for which this non-refundable deposit has been taken by the service provider; what the service provider has supplied to their distributors/franchisees; and whether or not this deposit is a disguised form of consideration for the"sale" or the "transfer of the right to use goods". Since the impugned revisional/ appellate/assessment orders are being set aside on other grounds, we refrain from examining the aforementioned questions of fact, and leave it open to the revisional/appellate/assessing authorities concerned to examine these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dable deposits" are collected from post paid subscribers for providing STD and ISD facility, it is the case of the Revenue that these "refundable deposits" are collected for supply of telephone equipment, rechargeable batteries and handsets to subscribers; and these "goods" are neither returned by the subscriber nor do the service providers refund the security deposit to the subscribers concerned. The case of the Revenue, in short, is that these refundable deposits are a form of disguised consideration for the transfer of right to use "goods". 61. If, as contended on behalf of the service providers, these "refundable deposits" are taken as security for payment due from subscribers who have availed STD and ISD facilities, such deposits can neither be said to be a"sale" nor are there any "goods" involved in such transactions. Consequently these refundable deposits cannot be brought to tax on the premise that there is a transfer of the right to use "goods". If on the other hand, as is contended by the Revenue, this security deposit is for supply of telephone instruments, handsets, batteries etc., then they may well be a form of disguised consideration for the transfer of the right to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... post paid subscribers as security for payment of dues towards STD or ISTD facilities provided by the service provider, then such deposits, not being "goods", cannot be brought to tax under the Act. 9. If, however, the refundable deposits are for supply of telephone instrument, hand set etc., which are "goods" and it is established that the deposits are a disguised form of sale consideration, then these refundable deposits may also form part of the sale consideration under Section 2(29)(b) of the Act, and would be chargeable to tax under Section 4 thereof. 63. The impugned revisional/appellate/assessment orders, under challenge in these writ petitions, are set aside. As we have held that telephone instruments, modems, mobile handsets and caller ID instruments are all "goods" and, if the service provider has either sold or has transferred the right to use such goods to the subscriber, such "sale" or the "transfer of the right to use" such goods is liable to tax under Section 4(1) and 4(8) of the Act, the orders of the STAT, under challenge in these TRCs, are set aside. The STAT/ revisional/appellate/assessing authorities concerned shall, in the light of the observations made in th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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