2006 (3) TMI 1 - SC - Service Tax

Composite contract - sales tax and service tax, Sales tax on Sim card, Transfer of goods, deemed sales, Taxability of goods and service tax - aspect of doctrine of res judicata - doctrine of statutory agency of the service provider.

Summary

Issues Involved:
1. Nature of the transaction by which mobile phone connections are enjoyed.
2. Legislative competence to levy sales tax or service tax.
3. Applicability of Article 366(29A)(d) of the Constitution.
4. Interpretation of the term "goods" in telecommunication.
5. Whether providing telephone connections involves inter-state sales.
6. Applicability of the aspect theory for taxation.

Issue-wise Detailed Analysis:

1. Nature of the Transaction by Which Mobile Phone Connections Are Enjoyed:
The principal question was whether the transaction for mobile phone connections is a sale, a service, or both. The Court examined whether the transaction partakes the character of both sale and service, and if so, whether both legislative authorities could levy their separate taxes together or only one of them.

2. Legislative Competence to Levy Sales Tax or Service Tax:
The contention of the service providers was that there was no sale transaction involved, and the attempt by States to levy tax on the provision of mobile phone facilities was constitutionally incompetent. They argued that the transaction was merely a service, and only the Union Government was competent to levy tax thereon. The States argued that the transaction was a deemed sale under Article 366(29A)(d) and thus within their legislative competence.

3. Applicability of Article 366(29A)(d) of the Constitution:
The Court discussed the interpretation of Article 366(29A), which extends the definition of 'sale' to include the transfer of the right to use any goods. The Court examined whether the provision of mobile phone connections involves a transfer of the right to use goods and concluded that electromagnetic waves or radio frequencies are not 'goods' within the meaning of Article 366(29A)(d).

4. Interpretation of the Term "Goods" in Telecommunication:
The Court analyzed whether electromagnetic waves or radio frequencies could be considered 'goods'. It concluded that electromagnetic waves do not fulfill the criteria for goods as they are not abstractable, deliverable, or marketable. The Court emphasized that the intention of the parties is crucial in determining whether a transaction involves the sale of goods.

5. Whether Providing Telephone Connections Involves Inter-state Sales:
The Court found the issue academic since electromagnetic waves or radio frequencies are not considered goods. Therefore, the question of whether providing telephone connections involves inter-state sales was left unanswered.

6. Applicability of the Aspect Theory for Taxation:
The Court rejected the application of the aspect theory to include the value of services in the sale of goods or the price of goods in the value of the service. It emphasized that the theory does not allow States to tax services by including the cost of such services in the value of goods.

Conclusion:
The Court held that the provision of mobile phone connections is primarily a service. The goods in telecommunication are limited to the handsets supplied by the service provider. The issue of whether SIM cards are goods was left for determination by the Assessing Authorities. The Court allowed the appeals filed by BPL and Escotel and remanded the matter to the Sales Tax Authorities for determination of the issue relating to SIM cards in light of the observations in the judgment. The writ petitions and appeals were disposed of accordingly, with no order as to costs.