2013 (6) TMI 81 - HC - VAT and Sales Tax

Passive Infrastructure Services to mobile phone operators - Telecommunication infrastructure - whether the activity of leasing the telecommunication towers to various mobile telephone operator be deemed as a sale within the meaning of Section 2(29)(d) of the KVAT Act, 2003? - Transfer of right to use passive telecommunication infrastructure, viz. towers, DG sets, air conditioners, power management systems etc., by provider of these services to mobile operator - Held that - It is well settled that, whether the transaction amounts to transfer of right or not cannot be determined with reference to a particular word or clause in the agreement. The agreement has to be read as a whole to determine the nature of the transfer. Thus from a close reading of all the clauses in the agreement it appears that under the terms of the contract there is no transfer of right to use the passive infrastructure conferred on the sharing operator/mobile operator. What is permitted under the contract is, a permission in the nature of a licence to have access to the passive infrastructure and permission to keep the equipments of the mobile operator in the pre-fabricated shelter with permission to have ingress and egress only to the authorised representatives of the mobile operator. It is because an owner of a property has a bundle of rights, namely right to possess, right to use and enjoy, right to usufruct, right to consume, to destroy, to alienate or transfer, etc.. Therefore, to constitute a deemed sale under Article 366(29A)(d) having regard to the object with the 46th Constitutional Amendment was inserted, it is clear the right that is transferred under a contract should be a bundle of rights minus right to title. Therefore, in deciding whether a transaction falls within Article 366(29A)(d) so as to constitute a deemed sale, the purpose of the 46th Amendment, the mischief sought to be remedied and the object sought to be achieved by the said provision cannot be lost sight of. Thus in the facts of this case, looking into the various terms of the agreement it is clear under the contract, the assessee has not transferred any right in the passive infrastructure to the mobile operators. The right that is conferred on the mobile operator is a permission to have access to the passive infrastructure, a permission to keep the active infrastructure in the site belonging to the assessee, a permission to mount the antennae on the tower erected by the assessee and to have the benefit of a particular temperature so as to operate the equipments belonging to the mobile operator. No sale of goods or transfer is involved in the transaction in question. Therefore, it does not fall within the mischief of Article 366(29A)(d) of the Constitution. Therefore, the impugned order passed by the learned single Judge as well as the assessing authority cannot be sustained. It is declared that under the contract entered into between the parties there is no sale of goods and at any rate there is no deemed sale so as to attract levy of tax under the Karnataka Value Added Tax Act, 2003. The payments made by the assessees either in terms of the order of the assessment order or in terms of any interim order passed in the Writ Petitions or in pursuance of the final order shall be refunded to the assessees within three months from the date of receipt of a copy of this order, failing which the said amount to be refunded would carry simple interest at 9% after the expiry of 90 days till the date of payment.

Summary

Issues Involved:
1. Whether the activity carried on and the service provided by the assessee constitute a deemed sale under Article 366(29A)(d) of the Constitution of India and thus liable to value-added tax (VAT).
2. Whether the levy of penalty and interest on the assessee by the State was justified.
3. Whether the State could recover VAT from the Union of India, as directed by the learned single Judge.

Issue-wise Detailed Analysis:

1. Deemed Sale under Article 366(29A)(d):
The primary issue was whether the activity carried on by the assessee, involving the provision of passive infrastructure to telecom operators, constituted a deemed sale under Article 366(29A)(d) of the Constitution of India, thereby attracting VAT.

- Factual Matrix: The assessee, a company providing passive infrastructure services to telecom operators, entered into agreements allowing telecom operators to access and use its infrastructure, such as towers, shelters, and power systems. The telecom operators installed their equipment on this infrastructure and paid the assessee for the access and related services.

- Assessing Officer's Findings: The Assessing Officer concluded that the transaction involved a transfer of the right to use the passive infrastructure, thus constituting a deemed sale. This was based on the interpretation that the telecom operators had effective control over the infrastructure, which was necessary for their operations.

- Court's Analysis: The court analyzed the terms of the contracts between the assessee and the telecom operators. It was noted that the assessee retained ownership and control over the passive infrastructure, merely providing access to the telecom operators. The agreements did not transfer possession or any interest in the infrastructure to the telecom operators. The court emphasized that providing access does not amount to a transfer of the right to use goods, which is essential for a deemed sale under Article 366(29A)(d).

- Conclusion: The court concluded that the transactions did not constitute a deemed sale, as there was no transfer of the right to use the passive infrastructure. The assessee merely provided a service by allowing access to its infrastructure.

2. Levy of Penalty and Interest:
The State had levied penalty and interest on the assessee for not paying VAT on the transactions.

- Court's Analysis: Since the court determined that the transactions did not constitute a deemed sale and thus were not subject to VAT, the basis for imposing penalty and interest was invalid.

- Conclusion: The court upheld the decision to deny the penalty and interest levied on the assessee, as there was no VAT liability.

3. Recovery of VAT from the Union of India:
The learned single Judge had directed the State to recover VAT from the Union of India, which had collected service tax from the assessee.

- Court's Analysis: Given the court's finding that the transactions were not subject to VAT, the direction to recover VAT from the Union of India was rendered moot.

- Conclusion: The court set aside the direction to recover VAT from the Union of India.

Final Judgment:
- The appeals by the assessee and the Union of India were allowed.
- The orders of the learned single Judge and the assessing authority were set aside.
- It was declared that the transactions did not constitute a deemed sale and were not subject to VAT.
- The denial of penalty and interest by the learned single Judge was upheld.
- The direction to recover VAT from the Union of India was set aside.
- The payments made by the assessee were to be refunded within three months, failing which they would attract interest at 9% per annum.