2010 (2) TMI 1093 - HC - VAT and Sales Tax

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? Whether the transaction in question does not come within the scope of section 6 of the Karnataka Value Added Tax Act, 2003? Held that - there is dedicated, effective and general control of the SBAS given to the customers who has the freedom of choice of selecting the manner, time and nature of use of the equipment, though within the frame work of the agreement of lease and hence, the right to use space segment capacity falls within the extended definition of sale , inasmuch as, there is delivery of possession in the said lease and there is a clear identification of the space segment capacity being delivered to the customer 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 from being brought within the purview of the KVAT Act. Accordingly, we answer point No. (ii) also against the appellant.

Summary

Issues Involved:
1. Whether the allotment of "space segment capacity" in the transponders and bandwidth of a communication satellite amounts to "sale or purchase of goods" under Article 366(29A)(d) of the Constitution of India and Section 2(29)(d) of the KVAT Act.
2. Whether the transaction falls within the scope of Section 6 of the Karnataka Value Added Tax Act, 2003.

Detailed Analysis:

Issue 1: Allotment of "Space Segment Capacity" as Sale or Purchase of Goods
The court examined whether the transaction of leasing "space segment capacity" in transponders of communication satellites constitutes a "sale or purchase of goods" under Article 366(29A)(d) of the Constitution and Section 2(29)(d) of the KVAT Act. The transaction involved the Department of Space (DOS) leasing out specific bandwidths in its satellites to customers. The court noted that the "leased capacity" in the transponders is dedicated to a particular customer, who has the right to use it at any time during the lease period, implying legal control over the leased capacity. Despite the technical operations being handled by DOS, the legal control and effective use of the transponder's capacity were with the customer. The court held that this constituted a transfer of the right to use goods, thus qualifying as a "deemed sale" under the KVAT Act.

Issue 2: Applicability of Section 6 of the KVAT Act
The appellant contended that the transaction did not fall within the scope of Section 6(4) of the KVAT Act, which deals with the place of sale of goods and the transfer of the right to use goods for any purpose. The court clarified that Section 6 is an enabling provision that brings transactions within the scope of the KVAT Act by fiction, irrespective of where the contract of sale or transfer of the right to use goods is made. Since the lease agreements were executed within Karnataka, the court held that Section 6(4) did not apply to exclude the transaction from the scope of the KVAT Act. The court reiterated that the taxable event is the execution of the contract for the transfer of the right to use goods, which occurred within the state, making the transaction subject to VAT.

Conclusion:
The court concluded that the transaction of leasing "space segment capacity" in transponders of communication satellites constitutes a "deemed sale" under the KVAT Act and that the provisions of Section 6(4) do not exclude such transactions from the scope of the Act. The respondent authorities were justified in issuing the demand notices for VAT on the transaction. The writ appeals were disposed of accordingly, with each party bearing its own costs.