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TMI Blog2015 (11) TMI 46X X X X Extracts X X X X X X X X Extracts X X X X ..... x months he will have to pay for repair or replacement of the same. We are of the considered view that this amounts to transfer of the right to use goods. - after the Forty-sixth Amendment the sale element of all the six contracts covered under clause (29A) of article 366 are separable and may be subjected to sales tax. Finally in para 92, the apex court again held that when a telephone connection is given there may be transfer of right to use goods and where both composite contract of service and sales is concerned the State may impose tax on the sale elements provided there is discernible sale and only the sale element can be taxed. State is assessing the tax solely on the basis of the value of the STBs as given in the books of account of the petitioners. The petitioners claim depreciation, etc., on these STBs and the valuation given by the petitioners is the value of the goods, the right to use which has been transferred to the customers. This is easily separable and discernible and the State has the full authority to levy value added tax on the sale part of the transaction, i.e., the value of the STBs. - no merit in the petitions - Decided against assessee. - W. P. (C) Nos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. 4. Various judgments have been relied upon by the parties. But the petitioners mainly rely upon para 44 (para 45 in STC) of the judgment in Bharat Sanchar Nigam Ltd. v. Union of India [2006] 3 VST 95 (SC); [2006] 145 STC 91 (SC); [2006] 282 ITR 273 (SC); [2006] 6 RC 276; [2006] 3 SCC 1 and contend that only a works contract, a hire-purchase contract and a catering contract can be divided and any other contract is indivisible and, therefore, the transaction is not exigible to tax within the meaning of the TVAT Act. 5. The contention of the State is that the transaction entered into by the petitioners virtually amount to sale of the STBs and in any event the petitioners have transferred the right to use the STBs to the customers and, therefore, such a contract is liable to be taxed within the meaning of section 4(2) of the TVAT Act. 6. At this stage it would be pertinent to refer article 366(29A) of the Constitution of India which reads as follows: 366. (29A) 'tax on the sale or purchase of goods' includes- (a) a tax on the transfer, otherwise than in pursuance of a contact, of property in any goods for cash, deferred payment or other valuable consideration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his decision of the apex court, it was felt necessary to amend Constitution with a view to widen the definition of sale as traditionally understood. In common law, sale was understood to mean an agreement to transfer title in the goods on payment of consideration. The Constitution was amended and sub-article (29A) was introduced in the Constitution by the Constitution (Forty-sixth Amendment) Act, 1982. By means of this Constitutional amendment, tax on the sale or purchase of goods now covered six more categories which may otherwise not have fallen within the definition of sale . Sub-clauses (a) to (f) to clause (29A) of article 366 of the Constitution bring within the ambit of sale, transactions where one or more of the essential ingredients of sale as traditionally understood were absent. By legal fiction such transactions, transfers and supply of goods were deemed to be sale and purchase of the goods. 10. After amendment of the Constitution the apex court in Gannon Dunkerley Co. v. State of Rajasthan [1993] 88 STC 204 (SC); [1993] 1 SCC 364 dealing with works contracts held that only the value of the goods involved in the execution of works contract could be taxed and thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of right. In other words, right to use arises only on the transfer of such a right and unless there is transfer of right, the right to use does not arise. Therefore, it is the transfer which is sine qua non for the right to use any goods. If the goods are available, the transfer of the right to use takes place when the contract in respect thereof is executed. As soon as the contract is executed, the right is vested in the lessee. Thus, the situs of taxable event of such a tax would be the transfer which legally transfers the right to use goods. . . 13. In State of Andhra Pradesh v. Rashtriya Ispat Nigam Ltd. [2002] 126 STC 114 (SC); [2002] 3 SCC 314, the apex court dealt with meaning of the phrase transfer of right to use goods . In that case the Rashtriya Ispat Nigam Ltd. was the owner of the Visakhapatnam Steel Project. It engaged various contractors to do the work and supplied sophisticated machines to the contractors for being used in execution of the contracted works. The Rashtriya Ispat Nigam Ltd. received hire charges for the same. The tax was levied on this transaction on the ground that there was a transfer of the right to use goods. The Andhra Pradesh High Court in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6] 3 VST 95 (SC); [2006] 145 STC 91 (SC); [2006] 282 ITR 273 (SC); [2006] 6 RC 276; [2006] 3 SCC 1 the petitioners before the Supreme Court argued that they were only providing service and there was no transfer of right to use goods. On the other hand it was contended by the State that there was transfer of the right to use goods and hence the transactions should be treated to be sales and were amenable to sales tax. Dealing with clause (29A) of article 366 of the Constitution the apex court held as follows (paras 42 to 46, pages 114 to 116 in 145 STC): 41. Sub-clause (a) covers a situation where the consensual element is lacking. This normally takes place in an involuntary sale. Subclause (b) covers cases relating to works contracts. This was the particular fact-situation which the court was faced with in Gannon Dunkerley Co. [1958] 9 STC 353 (SC) and which the court had held was not a sale. The effect in law of a transfer of property in goods involved in the execution of the works contract was by this amendment deemed to be a sale. To that extent the decision in Gannon Dunkerley [1958] 9 STC 353 (SC) was directly overcome. Sub-clause (c) deals with hire purchase where the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mendment does not give a licence for example to assume that a transaction is a sale and then to look around for what could be the goods. The word 'goods' has not been altered by the 46th Amendment. That ingredient of a sale continues to have the same definition. The second respect in which Gannon Dunkerley [1958] 9 STC 353 (SC) has survived is with reference to the dominant nature test to be applied to a composite transaction not covered by article 366 (29A). Transactions which are mutant sales are limited to the sub-clauses of article 366(29A). All other transactions would have to qualify as sales within the meaning of the Sale of Goods Act, 1930 for the purpose of levy of sales tax. 44. Of all the different kinds of composite transactions the drafters of the Forty-sixth Amendment chose three specific situations, a works contract, a hire purchase contract and a catering contract to bring within the fiction of a deemed sale. Of these three, the first and third involve a kind of service and sale at the same time. Apart from these two cases where splitting of the service and supply has been Constitutionally permitted in sub-clauses (b) and (f) of clause (29A) of article 36 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est applying. Therefore when in 2005, C. K. Jidheesh v. Union of India [2006] 3 VST 1 (SC); [2006] 144 STC 322 (SC); [2005] 279 ITR 118 (SC); [2005] 5 RC 670; [2005] 13 SCC 37 held that the aforesaid observations in Associated Cement Companies Ltd. v. Commissioner of Customs [2001] 124 STC 59 (SC); [2001] 4 SCC 593 were merely obiter and that Rainbow Colour Lab v. State of Madhya Pradesh [2000] 118 STC 9 (SC); [2000] 2 SCC 385 was still good law, it was not correct. It is necessary to note that Associated Cement [2001] 124 STC 59 (SC); [2001] 4 SCC 593 did not say that in all cases of composite transactions the 46th Amendment would apply. 50. What are the 'goods' in a sales transaction, therefore, remains primarily a matter of contract and intention. The seller and such purchaser would have to be ad idem as to the subject-matter of sale or purchase. The court would have to arrive at the conclusion as to what the parties had intended when they entered into a particular transaction of sale, as being the subject-matter of sale or purchase. In arriving at a conclusion the court would have to approach the matter from the point of view of a reasonable person of average intelli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... goods or the price of goods in the value of the service. Thus the apex court clearly held that though electromagnetic waves or radio frequencies are not goods, there may be transfer of right to use goods by giving a telephone connection. With regard to the SIM card, the question was left open. 19. The other relevant judgment on the point is Imagic Creative Pvt. Ltd. v. Commissioner of Commercial Taxes [2008] 12 VST 371 (SC); [2008] 2 SCC 614. In this case, the appellant before the apex court was an advertisement agency. It entered into a contract with ISRO for conceptualizing, designing and producing computer artwork. It also supplied the advertising material to its customers. It raised bills under two heads: (1) The bills raised for conceptualizing and designing were treated to be in the nature of service and service tax was paid on the same. (2) With regard to the goods it supplied to its customers, the company treated the said transaction as sale and paid sales tax on the same. When the matter came up before the High Court it rejected the plea of the assessee holding that the contract was a comprehensive contract for supply of printed material developed by the company. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or which the Constitution had to be amended and clause (29A) had to be inserted in article 366, must be kept in mind. 30. We have noticed hereinbefore that a legal fiction is created by reason of the said provision. Such a legal fiction, as is well known, should be applied only to the extent for which it was enacted. It, although must be given its full effect but the same would not mean that it should be applied beyond a point which was not contemplated by the Legislature or which would lead to an anomaly or absurdity. 31. The court, while interpreting a statute, must bear in mind that the Legislature was supposed to know law and the legislation enacted is a reasonable one. The court must also bear in mind that where the application of a Parliamentary and a Legislative Act comes up for consideration; endeavours shall be made to see that provisions of both the acts are made applicable. 32. Payments of service tax as also the VAT are mutually exclusive. Therefore, they should be held to be applicable having regard to the respective parameters of service tax and the sales tax as envisaged in a composite contract as contradistinguished from an indivisible contract. It may cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not. The Gauhati High Court held that they are not goods and, therefore, came to the conclusion that the contract for processing exposed photographic films is not a works contract. In our view this judgment has no applicability to the facts of the present case. 23. In Lakshmi Audio Visual Inc. v. Assistant Commissioner of Commercial Taxes [2001] 124 STC 426 (Karn), the Karnataka High Court was dealing with a case where the petitioners were carrying on the business of hiring audio visual and multimedia equipments. They had purchased public address systems, video cameras, LCD projectors, lighting and other related equipments. They had also engaged lot of technicians for this business. The case of the Revenue was that when this equipment is hired out by the petitioners to their customers, this would amount to a deemed sale under section 5C of the Karnataka Sales Tax Act, 1957. The court held as follows (pages 434 and 435 in 124 STC): 10. I will now examine the nature of a business of hiring of audio, visual and multimedia equipment, in the light of the aforesaid principles. The position will be as follows: (i) If the petitioner hires the audio/visual multimedia equipment t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustomers and in the year ending March 31, 2011 an amount of ₹ 1,68,78,13,832 was shown as revenue from the sale of STBs. In the year ending March 31, 2012 the revenue from sale of STBs was shown as nil but the activation and installation revenue were shown to be ₹ 1,62,15,01,992. It is, therefore, contended that the petitioners are actually selling the STBs but the contract is drafted in such a manner to show it to be activation and installation charges. Dr. Saraf submits that the petitioners cannot be permitted to take such a plea. 25. While hearing the petitions this court had clearly informed the petitioners that this court would take judicial notice of the websites of the companies to determine the dispute. In the website of Tata Sky Ltd. in the case of an ordinary STB, the charges for Tata Sky connection and standard activation are ₹ 1,600. Charges for activation of Tata Sky HD box is ₹ 2,000 with one month waiver of HD access fees. The charges for installation and activation of Tata Sky Plus HD activation box are ₹ 8,950 and the charges for Tata Sky 4k box is ₹ 6,400. As far as the electromagnetic waves are concerned there are monthly ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is that the petitioner-companies have not sold the STBs to the customers. There can however be no manner of doubt that the right to use these goods, i.e., the STBs has been transferred to the customers. In today's world, nothing is given free of cost. The cost of the STB is obviously included in the activation charges and/or the monthly subscription. Under the TVAT Act even where payment of the goods is made by way of deferred payment the goods can be subjected to tax. The main issue is whether the contract can be easily divided and the value of the goods can be ascertained with exactitude. 29. One of the most important elements of determining whether the right to use goods has been transferred or not is by ascertaining who has effective control over the goods. As far as STBs are concerned they are in total control of the customer. Under his effective control the STBs are installed in the house of the customer. He can use the STB when he wants to. He can use the STB to view whichever channel he wants to view. He may or may not use the STB. The company does not even have the power of enter ing the premises of the customer. Most importantly as per the terms of the agreement, t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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