The Hindu Business Line : <I>Tete-a-tete with experts on the telecom verdict </I>

The apex court has ruled that the imposition of sales tax on any facilities of telecom services is untenable in law because such services are not goods.

The verdict will mean different things to different people.

On March 2, 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 case was Bharat Sanchar Nigam Ltd (BSNL) vs Union of India. And the key question before the court was: whether the nature of the transaction by which mobile phone connections are enjoyed was a sale or a service or both.

The Supreme Court reasoned that electromagnetic waves are neither abstracted nor does their user consume them. "They are not delivered, stored or possessed. Nor are they marketable. They are merely the medium of communication." Thus, what gets transmitted is not an electromagnetic wave but the signal through such means, said the court. To know how professionals view the judgment, eWorld sent the following five questions to experts:

1) What are the immediate implications of the decision for: a) the industry; and b) the States' revenues.

2) Do you foresee that the logic of the judgment may be applied to other services that are currently taxed in various States?

3) Were the States to challenge the verdict, what grounds may be open to them?

4) Will the judgment be relevant when we move on to GST (goods and services tax) regime by the end of the decade, as stated by the Finance Minister in his recent Budget Speech?

5) How are telecom services taxed in other countries?

What follows is a compilation of views from responses received.

Immediate implications

On the immediate implications of the decision, N. Venkataraman, a Chennai advocate who was the briefing counsel for the BSNL case in question, has this to say. "There are three components, rentals, airtime and activation in the case of post-paid. Components are two, viz. airtime and activation, in the case of prepaid. Industry need not have to pay sales tax on these components any more; to that extent, there will be a decline in sales tax collections by the respective States." Porus F. Kaka, a Mumbai advocate, is of the view that this is a landmark judgement that seeks to provide clarity on the right to tax telecommunication services between the Centre and the States. "In the telecommunication industry it will ensure that the taxation of its `services' will not be also doubly charged to tax as sales tax." Kaka cites media reports that the benefit of the verdict would be in the tune of Rs 5,000 crore to each of the private operators and BSNL annually.

While the apex court has at last provided a much needed and deserved relief to telecom and cellular service providers, it has also opened room for some other problems for the governments, opines Dr Sanjiv Agarwal, FCA, FCS, Jaipur. For, the tax was quite a chunk, and the judgment disturbs the revenue pattern of the State Governments.

S. Murugappan, a Chennai advocate, opines that in financial terms, the judgment will not have any major impact for the service providers themselves, since almost all the service providers pass on the tax burden to the ultimate consumers. "However, the industry must be happy for the reason that they will be freed from the hassles of maintaining accounts and filing returns before different tax authorities. But this first impression may be short lived."

Logic overflow

How far will the logic of the judgment become applicable to other services that are currently taxed in various States? Venkataraman points out that after applying the aspect doctrine, the court has held that States have no power to impinge into the Union List, and so, what is taxable as service tax, cannot suffer sales tax. "The converse would also be true: What is liable to sales tax, because of the expanded deemed definition of `sale' cannot suffer service tax. Consequently leasing transactions, franchisee services and a section of intellectual property services, which suffer both these taxes, should not anymore suffer service tax."

Kaka is of the view that this judgement will go far beyond the telecommunication industry, "in answering some of the diverse aspects of the effect of 46th Constitutional Amendment bringing to tax under the Sales Tax Act, works contract, hiring contracts and so on." He says that in all these cases the court has now laid down that the essence of the transaction involving `goods' continues to remain for sales tax. "It is necessary that `goods' are involved dominantly in the transaction. The goods must also be in a deliverable state and delivery must eventually take place. Without `deliverable goods' it may be difficult to treat a transaction as a `sale'."

Agarwal notes, the "logic of this judgment comes partially from the Tata Consultancy Services case wherein the Supreme Court held that sales of software in a media is a good; and that for a sale to happen, goods must exist which must be capable of being bought and sold, transferred, delivered, stored and possessed. In case of telecom services all these things do not happen, as the goods in telecom services could be electromagnetic waves, which cannot be transferred, delivered, stored or possessed. They are just a media or conduit of communication. One can use the phone but not the waves." He expects that similar logic may be applied in other taxable services such as consulting engineering services, construction services, installation and erection services or even maintenance or repairs. "It may also impact the present system of allowing abatements in services where material is sold or consumed while rendering the service."

Murugappan notes that it is quite possible that service providers seek to apply the logic of this judgment to other services, which are being subjected to sales tax. "But the nature and scope of each service need not be the same as telecom service. Now, service tax is being charged by the Central Government on `intellectual property' services. At the same time, patents, trademarks and other goods of incorporeal or intangible character are liable for sales tax in terms of sales tax provisions of several states. Based on this judgment, there can be fresh litigation in those areas also."

Cases@TheHindu.co.in

To be concluded

Picture by Sampath Kumar G.P.

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