The Hindu Business Line : `Many a man knows no end of his goods'

A piece of Touchstone's wisdom, in As You Like It, reads: "It is said, `many a man knows no end of his goods:' right; many a man has good horns, and knows no end of them." At times, governments too know no end to `goods', which is what happened in the case of telecommunication services that many States taxed. Denouement, however, came on Thursday, when the apex court ruled that that the imposition of sales tax on any facilities of the telecom services is untenable in law because such services are not goods.

The verdict in Bharat Sanchar Nigam Ltd vs Union of India begins with this key question: Is the nature of the transaction by which mobile phone connections are enjoyed a sale or a service or both? "If it is a sale then the States are legislatively competent to levy sales tax on the transaction under Entry 54 List II of the Seventh Schedule to the Constitution," explained the court.

"If it is a service then the Central Government alone can levy service tax under Entry 97 of List I (or Entry 92C of List I after 2003). And if the nature of the transaction partakes of the character of both sale and service, then the moot question would be whether both legislative authorities could levy their separate taxes together or only one of them."

Companies argued that the transaction was merely a service that came within the ambit of the Union Government's taxing powers. The argument of State Governments, `the respondents', was that the transaction was "a deemed sale under Article 366 (29A)(d) of the Constitution read with the charging sections in their various sales tax enactments." As per this Article, `tax on the sale or purchase of goods' includes "a tax on the transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration."

Cell in many courts

Prospero says, in The Tempest, "This cell's my court." But the cell dispute had landed in many High Courts, such as in Allahabad, Andhra Pradesh, and Punjab & Haryana. These three courts had held that there was no sale of goods under the State Sales Tax Acts justifying the levy of sales tax on rentals charged by service providers to its subscribers. However, the three decisions were overruled by the apex court in State of UP vs Union of India (2003).

The Kerala High Court had taken a view that favoured the Revenue, when deciding Escotel Mobile Communications vs Union of India (2002). In that case, the issue was about including the value of activation charges in the sale price of the SIM (Subscribers Identification Module) card, for computing sales tax.

"Hear a footfall: we now are near his cell," is from The Tempest. To taxman, though, it was, "Hear a cell call. That's a wave to grab!" But then the aggrieved companies knocked the doors of the Supreme Court.

Justices Ruma Pal and Dalveer Bhandari of the apex court considered the res judicata objection at length, pored over many precedents, narrated the history of Article 366(29A), dwelt upon the Gannon Dunkerley decision that had the held the field for long, and spoke of the composite transactions that were spelt out by the drafters of the 46th Amendment.

Good waves

The judges found that the States' argument of what constituted `goods' in telecommunication were "the electromagnetic waves by which data generated by the subscriber was transmitted to the desired destination". One learns that `inspiration' for the argument was from the provisions of the Indian Telegraph Act, 1885 which defines telegraph as "any appliance, instrument, material or apparatus used or capable of use for transmission or reception of signs, signals, writings, images and sound or intelligence of any nature by wire, visual or other electro-magnetic emissions, Radio waves or Hertzian waves, galvanic, electric or magnetic means."

Verdict notes, "It is clear, electromagnetic waves are neither abstracted nor are they consumed in the sense that they are not extinguished by their user. They are not delivered, stored or possessed. Nor are they marketable. They are merely the medium of communication." Thus, "what is transmitted is not an electromagnetic wave but the signal through such means." In telecommunication what is transmitted is the message by means of the telegraph, and no part of the telegraph itself is transferable or deliverable to the subscribers, reasoned the court. "As far as the subscriber is concerned, no right to the use of any other goods, incorporeal or corporeal, is given to him or her with the telephone connection."

An interesting analogy in the verdict reads thus: "Providing access or telephone connection does not put the subscriber in possession of the electromagnetic waves any more than a toll collector puts a road or bridge into the possession of the toll payer by lifting a toll gate."

Goods do not include electromagnetic waves or radio frequencies for the purpose of Article 366(29A)(d), ruled the court. "The goods in telecommunication are limited to the handsets supplied by the service provider." Justice Dr AR. Lakshmanan concurred with the opinion, in a separate judgment, and said, "I am, therefore, of the view that the imposition of sales tax on any facilities of the telecommunication services is untenable in law."

Tailpiece

A line from Titus Andronicus reads, "Sweet cell of virtue and nobility." Perhaps, cells and calls only become sweeter by virtue of this decision.

Detaxification@TheHindu.co.in

D. Murali

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