2009 (1) TMI 793 - HC - VAT and Sales Tax

Whether the learned single judge is justified in dismissing the W.P. No. 1537 of 2007 filed by the appellant-assessee (Bharti Airtel Ltd. v. State of Karnataka 2007 (3) TMI 684 - KARNATAKA HIGH COURT declining to quash the order of reassessment passed by the third respondent-assessing authority and consequent 12 notices issued by him demanding from the appellant-assessee the tax quantified thereunder, on the ground that the appellant-assessee did not avail of the statutory remedy of appeal provided under the Karnataka Value Added Tax Act, 2003? Whether the third respondent-assessing authority was justified in passing the impugned order dated January 12, 2007 making reassessment of the tax payable by the appellant-assessee-company on the ground that the broadband connectivity provided by the appellant to its subscribers amounts to sale of light energy taxable under section 3 of the Karnataka Value Added Tax Act, 2003? Whether the Government of Karnataka has authority under the Constitution of India to levy tax on the appellant-company under the provisions of the KVAT Act in respect of its transaction of providing broadband connectivity to its subscribers, for the reason that service tax has been levied on it by the Union Government under the provisions of the Finance Act, 1994 treating the said transaction as service ? Held that - As rightly submitted by the learned counsel for the appellant-assessee the question whether the transactions of the appellant-company with its subscribers could only be service for which it is liable to be taxed only under the provisions of the Finance Act, 1994 or it involved the element of sale of goods making it liable to be taxed under the provisions of the KVAT Act and whether the appellant-company could be taxed under both the said provisions, could not be decided by the appellate authority under the KVAT Act. Therefore, we are of the considered view, that the appellantassessee-company could maintain its said writ petition and as such the learned single judge is not justified in dismissing the same only on the ground that the appellant-assessee did not avail of alternative statutory remedy available to it under the said Act. Hence point No. 1 is answered in the negative and in favour of the appellant-assessee. We answer both the point Nos. 2 and 3 formulated by us in this appeal in the affirmative holding that the third respondentassessing authority is justified in passing the impugned order dated January 12, 2007 making the reassessment of the tax payable by the appellant-assessee-company on the ground that the activity of providing broadband connectivity by the appellant-company to its subscribers amounts to sale of light energy taxable under section 3 of the KVAT Act, 2003 and further holding that the Government of Karnataka is competent to levy tax on the said sale under the provisions of the KVAT Act, 2003 on the entire proceeds collected by it from its subscribers as lease rentals despite the appellant-company being assessed to service tax on the said activity by the Union Government under the provisions of the Finance Act, 1994, treating it as service . Since the learned counsel for the appellant-assessee did not advance his arguments on the legality of the impugned order of the assessing authority insofar as it relates to the imposing of penalty and interest on the appellant-assessee, we have not considered the same.

Issues Involved:
1. Justification of the dismissal of the writ petition by the learned single judge.
2. Justification of the reassessment order by the third respondent-assessing authority.
3. Authority of the Government of Karnataka to levy tax on the appellant-company under the KVAT Act.

Detailed Analysis:

Issue 1: Justification of the Dismissal of the Writ Petition
The appellant-assessee contended that the learned single judge erred in dismissing the writ petition on the ground that the appellant did not avail of the statutory remedy of appeal under the KVAT Act. The appellant argued that the statutory remedy was not efficacious due to the requirement of depositing 50% of the tax demanded (over Rs. 12 crores), making it onerous. The appellant also claimed that the issue of whether their activity was a service or a sale could not be decided by the appellate authority under the KVAT Act, thus justifying the writ petition.

The court referred to the Supreme Court decisions in Himmatlal Harilal Mehta v. State of Madhya Pradesh and J.M. Baxi & Co., Gujarat v. Commissioner of Customs, New Kandla, which held that where the alternative remedy is onerous, a writ petition is maintainable. The court concluded that the alternative remedy was not efficacious and that the question of whether the appellant's activity was a service or a sale could not be decided by the appellate authority. Therefore, the learned single judge was not justified in dismissing the writ petition solely on the ground of non-availment of the alternative remedy.

Issue 2: Justification of the Reassessment Order
The appellant argued that their activity of providing broadband connectivity involved no sale of goods but was purely a service, for which they were already paying service tax under the Finance Act, 1994. They contended that the reassessment order treating the activity as a "sale of light energy" was erroneous.

The court examined whether the "artificially created light energy" (ACLE) used for transmitting data through the appellant's optic fibre cable (OFC) network could be considered "goods" and whether there was a "sale" of such energy. The court found that ACLE is artificially created by the appellant and possesses the characteristics of "goods" as defined under Article 366(12) of the Constitution, Section 2(15) of the KVAT Act, and Section 2(7) of the Sale of Goods Act, 1930. The court also determined that the appellant's activity involved the transfer of property in ACLE to its subscribers for a consideration, thus constituting a "sale" under Section 2(29) of the KVAT Act.

The court further held that the dominant object of the transaction was the sale of ACLE, with the provision of OFC network infrastructure being incidental. Therefore, the reassessment order was justified.

Issue 3: Authority of the Government of Karnataka to Levy Tax
The appellant argued that since they were already paying service tax under the Finance Act, 1994, the Government of Karnataka had no authority to levy VAT on the same transaction. They contended that the dominant object of the transaction was service, and any element of sale was incidental.

The court referred to Article 246 of the Constitution, which allows both the Union and State Governments to levy taxes on different aspects of the same transaction. The court held that the State Government was competent to levy tax on the sale of ACLE under Entry 54 of List II in the Seventh Schedule to the Constitution. The court also applied the "dominant nature test" and concluded that the dominant object of the transaction was the sale of ACLE, with the service element being incidental.

The court further noted that the amounts collected by the appellant from its subscribers as "lease rentals" were inseparable, and thus the entire proceeds were liable to be taxed under the KVAT Act.

Conclusion
The court allowed the appeal in part, setting aside the order of the learned single judge dismissing the writ petition on the ground of non-availment of the alternative remedy. However, the court dismissed the appeal on the merits, confirming the reassessment order and holding that the Government of Karnataka was competent to levy tax on the sale of ACLE despite the appellant being assessed to service tax under the Finance Act, 1994.

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