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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 ..... . - However, if, these goods are procured by the subscribers from suppliers, other than the service providers or their distributors/franchisees, the monthly charges, which the subscriber is called upon to pay by the service provider, would fall within “telecommunication service” and cannot be made liable to tax under the Act. If non-refundable deposits are collected, by the service providers from their distributors, as security deposit for supply of SIM cards, recharge voucher coupons and the like, such deposits would not fall within the ambit of "goods" and cannot be brought to tax under the provisions of the Act. - If, on the other hand, the non-refundable deposit is received against supply of telephone instruments, batteries, accumulators etc., and it is established that the said deposit is a disguised form of consideration either for the sale or for the transfer of right to use such goods, then these deposits would form part of the sale consideration and be subject to tax under the provisions of the Act. - Likewise, if refundable deposits are collected from post paid subscribers as security for payment of dues towards STD or ISTD facilities provided by the service provider, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 could be called as hand sets. 3. It would suffice to note the facts in W.P. No.28394 of 2007 as representing the facts involved, and the questions which arise for consideration, in these batch of writ petitions. The petitioner, a company incorporated under the Companies Act, 1956, provides telecommunication services to various subscribers all over the country. They are registered dealers on the rolls of the Commercial Tax Officer, Begumpet. They are registered with the Assistant Commissioner, Begumpet Circle, for payment of service tax. The 1 st respondent, by his order dated 07.12.2007, held that sale of, or transfer of the right to use, the aforementioned goods were chargeable to tax either under Section 4(1) or Section 4(8) of the Act. 4. Sri Sunil Gupta and Sri E. Manohar, Learned Senior Counsel; Sri Lakshmi Kumaran Sridharan, Sri C.R. Sridharan, Sri R. Raghunandan, Sri S. Krishnamurthy, Sri Sheikh Jeelani Basha, Sri M.V.J.K. Kumar and Sri A.K. Jaiswal, Learned Counsel put forth their submissions on behalf of the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a second. All this is made possible by a computer which simultaneously receives, analyses and distributes data by sending and receiving radio/electro-magnetic signals. Every cell phone contains a circuit board which is its brain. It is a combination of several computer chips programmed to convert analog to digital and digital to analog, and translation of the outgoing and incoming signals. (Syed Asifuddin v. State of A.P ((2006) 1 ALD (Crl.) 96 (A.P)). The functioning of the mobile telecommunication system/network involves the following steps: i) the subscriber originates/generates/produces the voice by speaking through the handset; ii) this voice generated by the subscribers is transmitted on airwaves to the BTS; iii) BTS then transmits the said voice to a modified Flexent' wireless platform on airwaves/cables; iv) The modified Flexent' in turn verifies and validates the authenticity of the subscriber and, upon such verification, transmits the said voice to the local exchange via BZ-SP on cables; v) the LE switches the voice of the subscriber to the Called Party which voice is again carried from LE to modified Flexent' via BZ-SP to BTS to the Called Party's handset/telephone in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scriber Identification Module (SIM) card contains a computer chip with pre-recorded instructions. It is a device which helps the service provider identify the subscriber. It also enables the subscriber access the service provider's network by means of electro-magnetic waves. The SIM card is merely a key to enter the service provider's facility, and use their services. The process of activation involves information being fed into the computer maintained by the service provider, such as particulars of the amount charged, the identity of the subscriber, etc. In determining the issue as to what a SIM card represents, the following principles should be borne in mind. If the SIM card is not sold to the subscriber, but merely forms part of the services rendered by the service provider, it cannot be charged separately to sales tax. It is only if the parties intend that the SIM card should be a separate object of sale, can sales tax be levied thereon. If the sale of a SIM card is incidental to the service being provided, and merely facilitates identification of the subscribers, their credit and other details, it would not be assessable to sales tax. (Bharat Sanchar Nigam Ltd. (2006) 3 SCC 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 charged to tax under Section 4 of the Act. It is only if the amount received represents the consideration for the sale of the SIM card, and not for the telecommunication services provided by the service provider after the subscribers mobile telephone is activated and connected to their network, would the sale of SIM cards be liable to tax under the Act. 12. In order to determine whether or not the amount collected for issuing a prepaid SIM card represents the consideration for the sale of the SIM card, it is necessary to understand the concept of"sale". Section 2(28) of the Act defines"sale" to mean every transfer of property in goods (whether as such goods or in any other form in pursuance of a contract or otherwise) by one person to another in the course of trade or business for cash, or for deferred payment, or for any other valuable consideration. The classical concept of sale" has three essential components namely, (i) an agreement to transfer title, (ii) supported by consideration, and (iii) an actual trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nues 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 be disintegrated. The test for deciding whether a contract falls into one category or the other is as to what is the substance of the contract or the dominant nature test . (Bharat Sanchar Nigam Ltd. (2006) 3 SCC 1). Even if it were to be presumed that in the instrument of contract, which is composite in form, there are two distinct and separate contracts-one for sale, and the other for service rendered consequent to activating the cell phone and connecting it to the network of the service provider, and these two distinct and separate contracts are discernable as such, what can be subjected to tax is, at best, the contract of sale of the SIM cards, and not on the telecommunication services rendered by the service provider after the subscribers mobile telephone is activated. While the Starter Pack contains both the SIM card and the literature relating to the manner in which it is to be used to activate the subscribers mobile phone, the price charged for the SIM card represents a fraction of the total amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 not allowed to entrench upon the Union List and tax services by including the cost of such service in the value of "goods". ( Bharat Sanchar Nigam Ltd. (2006) 3 SCC 1); Association of Leasing and Financial Service Companies v. Union of India (2010) 35 VST 549 (SC); M/s. G.S. Lamba Sons, represented by Mr. Gurusharan Singh Lamba v. State of Andhra Pradesh Judgment in TRC Nos.154, 155, 156, 157, 160, 169, 170, 181, 205 and 243 of 2010 dated: 28.1.2011 ; M/s. Viceroy Hotels Ltd v. The Commercial Tax Officer Judgment in W.P. No.17092 of 2010 batch dated 23.02.2011). 15. It is wholly unnecessary for us to dwell any further on this issue in view of the judgment of the Supreme Court in IDEA Mobile Communication Ltd. v. C.C.E C., Cochin Judgment in Civil Appeal No.6319 of 2011 dated 4.8.2011. The question which arose for consideration, in IDEA Mobile Judgment in Civil Appeal No.6319 of 2011 dated 4.8.2011 , was whether the value of SIM cards, sold by the service provider to their mobile subscribers, should ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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, be treated as property much less as "goods"; and it is merely a piece of instruction given by the service provider to the subscriber. 18. It is urged on behalf of the Revenue that Recharge coupons, unlike easy recharge coupons (i.e., Electronic voucher dispensation), are subjected to tax as they are "goods"; they have value irrespective of what they represent; they are tangible goods, and not merely a token of service; they are freely exchangeable; once purchased, they can be used by anyone having a cellular phone connection with the service provider; recharge coupons, like SIM cards, have the attributes of goods; they have the qualities of utility and are capable of being bought and possessed; electronic recharge does not involve physical goods and is different from physical recharge coupons; recharge vouchers are transferred, from the service provider to distributors, as general merchandise; they are sold for a price and are kept as stock in trade; the terms and conditions of the agreement for app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om 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 recharge coupon slip becomes useless. A recharge coupon is progressively being dispensed with, and the talktime/validity period of the connection is now being extended by Electronic Voucher Dispensation which is executed wholly electronically and telegraphically without the involvement of the card or slip of paper called the Recharge coupon. By mere delivery of the recharge coupon, the subscriber gets no right to use any "goods". The recharge coupon is only a means for accessing the service provider's network, and does not constitute a separate sale of "goods". The intention of the parties, in the sale and purchase of recharge coupons, is merely to provide, and gain, access to the network of the service provider, and extend the talk time or the validity period of the connection. 21. As observed in relation to SIM cards, the expression sale of goods involves an agreement between the parties for the sale of the very goods in which the property eventually passes. The parties to the agreement must ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 services . The impugned revisional/appellate /assessment orders, seeking to levy tax under the Act on recharge coupons, are without jurisdiction and illegal. MOBILE TELEPHONE RENTALS : 24. It is contended on behalf of the petitioners that they do not collect any amount towards the SIM card or for activation charges from post-paid subscribers; they adopt various tariff plans as per TRAI guidelines; each plan has a fixed and variable portion called bill plan charges/monthly rentals; the variable charges are called call charges/usage charges ; these terms are adopted as suggested by the TRAI; the bill plan charges are fixed commitment charges that every subscriber is required to pay to the service provider towards the service received by them; monthly rentals/bill plan charges are the minimum assured service receipts of the petitioner from the subscriber; the monthly rentals cannot be treated as consideration for the transfer of the right to use the SIM cards; it is only one or two of the se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rporation 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 software must acquire the status of "goods" while still in the hands of the supplier; in these cases there is no supply of software but only of textual, audio or visual signals and messages, whether it be in the form of information, music or games of one or the other kind; there is no incorporation of the alleged software as "goods" by the service/content provider to the subscriber; even if it is presumed that it is software in process, supply of such software is done by means of a telephone/telegraph line by the subscriber dialing or punching a particular digital number, or sending a signal in the form of an SMS to a particular telephone number; it is received in the mobile instrument of the subscriber telegraphically; the software neither becomes goods nor is there transfer or sale of goods; the alleged software is neither downloaded nor stored in a physical medium (floppy, disc etc) before or for the purposes of being marketed and transferred from the end of the service provider to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd 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 wire or wires used for the purpose of a telegraph, with any casing, coating, tube or pipe enclosing the same, and any appliances and apparatus connected therewith for the purpose of fixing or insulating the same. The proviso to Section 4(1) enables the Central Government to grant a licence to any person to establish, maintain or work a telegraph within any part of India. Section 19-B enables the Central Government to confer upon any licensee under Section 4, in respect of the extent of his license, all or any of the powers which the telegraph authority possesses with regard to a telegraph. Section 2(1)(e) of the Telecom Regulatory Authority of India Act, 1997 (for brevity the TRAI Act) defines licensee to mean any person licensed, under sub-section (1) of Section 4 of the Indian Telegraph Act, for providing specified public telecommunication services. Section 65(111) of the Finance Act, 1994 defines telegraph authority to include a person who has been granted a licence under the fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... zzb) 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. The contract, between the telecom service provider and the subscriber, is mainly to receive, transmit and deliver the messages of the subscriber through a complex system of fibre optics, satellite and cables. The subscriber originates/ generates his voice message through the handset. The transmitter in the handset converts the voice into radio waves within the frequency band allotted to the service provider. The radio waves are transmitted to the switching apparatus in the local exchange and, after verifying the authenticity of the subscriber, the message is transmitted to the telephone exchange of the called party, and then to the nearest Base Transceiver Station (BTS). BTS transmits the signal to the receiver apparatus of the called subscriber, which converts the signals into voice, which the subscriber can hear. (Bharat Sanchar Nigam Ltd (2006) 3 SCC 1). 32. The service provider provides a variety of value added services as are permitted under the agreement. Short Message Servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 properties be tangible or intangible. The Chambers Dictionary New Edition Reprint 2000- 2001 defines Tangible to mean perceptible by the touch, capable of being possessed or realized; material, corporeal a tangible thing or asset i.e., physical property as opposed to goodwill; and Intangible to mean not tangible or perceptible to touch; something intangible eg a supplementary asset such as goodwill. The New Oxford Dictionary defines Tangible to mean perceptible by touch; and Intangible to mean unable to be touched or grasped; not having physical presence; not constituting or represented by a physical object and of a value not precisely measurable; intangible business property like trade marks and patents. Tangible or intangible property would become "goods" provided they have the attributes thereof having regard to (a) its utility; (b) capability of being bought and sold; and (c) capability of being transmitted, transferred, delivered, stored and possessed. (Tata ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice 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 any portion of the wiring, the cable, the satellite, the telephone exchange, etc. (Bharat Sanchar Nigam Ltd. (2006) 3 SCC 1). 35. Among the tests to determine whether a property is "goods", for the purposes of sales tax, is whether the concerned item is capable of being delivered. The essence of the right, under Article 366(29-A)( d ), is that it relates to user of goods. It may be that the actual delivery of the goods is not necessary for effecting the transfer of the right to use the goods but the goods must be available at the time of transfer, must be deliverable and delivered at some stage. It is assumed, at the time of execution of an agreement to transfer the right to use, that the goods are deliverable. If the goods are not deliverable, the question of the right to use those goods would not arise. (Bharat Sanchar Nigam Ltd. (2006) 3 SCC 1). Providing access or telephone connection does not put the subscriber in the possession of electromagnetic waves. In a sale of g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 tower where they have exclusive right against all other service providers including the passive service provider; except the beneficiary party no one else can either place their equipment or have access to the designated space/place; other goods, such as air conditioner, diesel generator, electrical wiring, power plant etc., are commonly provided to all infrastructure sharing parties; when common assets are commonly leased to more than one beneficiary party, the consolidated rent/lease amount received represents the consolidated charge for lease of the said equipment; it represents a consolidated transfer of the right to use the said goods; the common facilities include a part of the tower; moveable goods such as shelter, air conditioning equipment, diesel generator, electrical wiring, electrical installations, power plant, batteries, electricity accumulators, etc., are jointly availed by the co-service providers; their transfer for joint use to all co-service providers f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tructure 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 beneficiary party, (also a service provider), bring their own BTS, access radio and other equipment. The right, title and interest on such sites, and the identified assets thereon, remain with the PASSIVE INFRASTRUCTURE SERVICE PROVIDER. The right, title and interest in the BTS, access radio and other equipment brought in by the beneficiary party remains with the beneficiary party. The PASSIVE INFRASTRUCTURE SERVICE PROVIDER is responsible for obtaining necessary permissions/approvals from local/municipal authorities/ departments. The beneficiary party is entitled to use the identified assets, subject to technical feasibility. Upgradation is required to be made by the principal owner, after consulting the beneficiary party. The beneficiary party has free access to the identified assets and/or the sites as per the procedure agreed upon by the parties. Section 11(b)(iv) of the TRAI Act relates to functions of the authority and, under sub-sections (b)(iv) thereof, the au ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of APHC DB in W.P. No.23811 of 2009 dated: 11.02.2011). The 90 metre huge tower can only be erected at another place after it is completely dismantled at the existing site, and cannot be moved to another place of use in the same position. The telecommunication tower is, therefore, immovable property and not "goods" liable to tax under the Act. 42. Under Article 366(29-A)( d ) levy of tax is not on the use of goods, but on the transfer of the right to use goods. The right to use goods accrues only on account of the transfer of the right and, unless there is a transfer of the right, the right to use does not arise. It is the transfer which is the sine qua non for the right to use any goods. The title to the goods, under sub-clause ( d ) of Article 366 (29-A), remains with the transferor who only transfers the right to use the goods to the purchaser. Yet, by fiction of law, it is treated as a sale. Article 366(29-A) has served to extend the meaning of the word "sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 closure of service, and full refund of the security deposit is made to them; Cell phones are not sold or provided, and they have to be procured by the mobile customers themselves; in the case of landline or broadband connections, the subscriber is given the option to choose the bill plan depending on his usage as in the case of SIM card post-paid connections; the petitioners do not charge any amount from the subscriber towards the handset/modem; these devices are incidental to the rendition of telecommunication service ; even if it is held that there is a transfer of the right to use the modem and the handset, the consideration cannot be split since Article 366(29A) of the Constitution does not allow divisibility of transactions relating to the transfer of the right to use goods; even if the handsets/modems are held to have been sold, the consideration for the bill plan charged each month cannot be attributed entirely towards the handset/modem; and the depart ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 goods is with the subscriber and not the service provider. The contention urged on behalf of the petitioners, that these instruments are supplied free of charge as part of the end equipment and, as such, no tax can be levied thereon, does not merit acceptance. It is the admitted case of the petitioner-BSNL that, in cases where customers purchase their own instruments, they are offered a rebate in installation charges. It is, thus, evident that in cases where the telephone instruments, modems and mobile hand sets are supplied by the petitioners, the subscribers are not given any rebate in the installation charges. In effect, the rebate portion of the installation charges is, admittedly, the consideration received by the petitioners for supply of telephone instruments, handsets and modems. This consideration would, undoubtedly, constitute either "sale" or transfer of the right to use goods liable to tax either under Section 4(1) or Section 4(8) of the Act. Ev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. The Caller ID instrument also falls within the ambit of "goods" both under Article 366(12) of the Constitution of India and under Section 2(16) of the Act. The observations made in this order, in the context of telephone instruments, mobile handsets and modems, would apply equally to caller ID instruments also. The revisional/appellate/assessing authorities concerned shall pass orders afresh, after putting the petitioners - service provider on notice and giving them opportunity of being heard. NON-REFUNDABLE DEPOSIT : 54. It is contended on behalf of the petitioners that the one time fee, collected from distributors, is a security deposit taken from distributors or franchisees; they are received by the service provider for supply of Sim cards, recharge coupons etc; as these are incidental to the rendering of service, the finding that the franchise involves trademark, trade name, logo, symbol etc is of no consequence; they do not constitute "g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pugned 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 questions afresh, in the light of the observations made in this order, after putting the petitioners on notice and giving them an opportunity of being heard. REFUNDABLE DEPOSITS : 58. Counsel for the petitioners-service providers would submit that refundable deposits are collected from post-paid subscribers for providing STD, ISD facility etc; based on the security amount, credit limits are fixed for the subscribers; the said facility is part and parcel of telecommunication service; the amount collected as security deposit from the subscribers is to ensure that payment of charges for STD, ISD etc., is not avoided by the subscribers; imposition of sales tax thereon is ex facie without jurisdiction; there is no sale of goods involved; this amount is refundable subject to satisfactory return of equipment and clearance of all outstanding dues. 59. On the other hand it is urged on behalf of the Revenue that most of the service providers we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ght 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 use "goods" as telephone instruments, handsets and batteries would undoubtedly constitute "goods" both under Article 366(12) of the Constitution of India and Section 2(16) of the Act. These are also questions of fact which we are not inclined to examine in these writ proceedings. The revisional/appellate/assessing authorities concerned may, after putting the petitioners-service providers on notice and giving them an opportunity of being heard, examine these questions and pass appropriate orders in the light of the observations made in this order. CONCLUSION : 62. We summarise our conclusions as under: 2. SIM cards, recharge coupon vouchers, mobile telephone rentals on post paid connections, value added services such as ring tones, music down loads, wall papers etc., and proceeds received on sharing of infrastructure cannot be subjected to tax either under Section 4(1) or Section 4(8) of the Act. 3. Telephone instruments, mobi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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