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BSNL v. Union of India

BSNL v. Union of India

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Published by Mayank Jain
Case Comment on whether cellular services fall under the category of goods or not.
Case Comment on whether cellular services fall under the category of goods or not.

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Published by: Mayank Jain on Nov 22, 2008
Copyright:Attribution Non-commercial

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01/11/2013

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B
HARAT
S
ANCHAR
N
IGAM
L
TD
.
AND
A
NR
.
V
. U
NION
 
OF
I
NDIA
 
AND
 O
RS
.
(2006) 3 SCC 1
P
AST
H
ISTORY
O
F
T
HE
C
ASE
 
The service providers who were the writ petitioners before the Kerala High Court in acase
 Escotel Mobile Communications Ltd. vs. Union of India, (2002) 126 STC 475(Ker.)
questioned the correctness of the decision of High Court and filed appeal beforeSupreme Court. Further, other Service Providers also approached the Apex Court byway of writ petitions under Article 32 of the Constitution of India. When the CivilAppeals and writ petitions were listed before two learned Judges, the matter wasreferred to a Larger Bench as the
“Nature of the questions raised in appeals/petitionswas important”.
T
HE
D
ECISION
I
N
T
HE
E
SCOTEL
S
C
ASE
 
The issue of the nature of transactions by which mobile phone connections areenjoyed – it is a sale or is it a service or is it both – had been coming up for consideration before the High Courts. The High Courts of Allahabad,
1
AndhraPradesh
2
and Punjab and Haryana
3
held that there was no sale of goods justifying thelevy of State sales tax on rentals charged by service provided to its subscribers. All thethree decisions were however overruled by the Supreme Court in the case of 
State of UP v. Union of India
4
.
However, the Kerala High Court took a different view in the case of 
 Escotel MobileCommunications Ltd.
v.
Union of India
5
and held that the transaction of sale of a SIMcard included its activation and thus formed part of State Sales tax. It also held thatselling of SIM cards and the process of activation were services as well and fellwithin the definition of Taxable service as defined in Section 65(72)(b) of the FinanceAct, 1994.
P
RINCIPAL
Q
UESTION
B
EFORE
T
HE
SC
1
Union of India v. State of Uttar Pradesh, (1999) 114 STC 288 (All)
2
Union of India v. Secy, Revenue Department, (1999) 113 STC 203 (AP)
3
Union of India v. State of Haryana, (2001) 123 STC 539 (P&H)
4
(2003) 3 SCC 239
5
(2002) 126 STC 475 (Ker)
 
The main question which was to be determined in the case was whether thenature of transactions by which mobile phone connections are enjoyed fall withinthe ambit of sale, service or both?
If it is a sale, states are legislatively competent to levy sales tax on the transactionunder entry 54, List II of the Seventh Schedule to the Constitution. If it is a service,the Central Government alone can levy service tax under entry 97 of List I (or entry92c of List I after 2003). And if the nature of the transaction falls in categories of bothsale and service, the moot question would be whether both legislative authoritiescould levy their separate taxes at the same time or only one of them can do so.
C
ONTENTIONS
O
F
T
HE
P
ETITIONER
 
That the service providers are licencees under Section
4
of the Telegraph Act,1885 and provide 'telecommunication services' as provided under Section 2(k)under the Telecom Regulatory Authority of India Act, 1997. Service tax isimposed on them under the Finance Act, 1994 on the basis of the tariff realisedfrom the subscribers. They further contended that in providing such servicethere is in fact no 'sales' effected by the service providers.
Clause (d) of Article 366(29A) relied upon by the respondents contemplates atransfer of a legal right to use goods. According to the petitioners there is notransfer of any legal right by the service providers nor any delivery of anygoods which may be covered under the Telegraph Act, 1885 as the same is barred and prohibited in terms of the licence granted to service providersunder Section 4 of that Act. Further, without a delivery of goods, there could be no transfer of any right to use those goods as contemplated under Article366(29A)(d).
It was further emphasised that there must be goods of which the right totransfer is covered by sub-clause (d) of clause (29A) of article 366. It issubmitted that what the service providers provide was a means ocommunication and what was transferred was the sounds of the message or signals which were generated by the subscribers themselves.
It is further submitted that the SIM card was merely an identification devicefor granting access and was a means to access services. Hence, the SIM cardwas not goods it merely enables activation.
 
2
 
It is pointed out that the sale was factually and legally distinct from theactivity of giving the connection or activation of the SIM cards.
It was submitted that taxing telecommunication services as a deemed saleunder Entry 54 of List II would be violative of Article 286 of the Constitutionas the same involves connecting subscribers throughout the territories of Indiawithout any regard to State boundaries.
It is contended that there was no transfer of any right to use any goods and the parties never intended for such transfer. It is submitted that the court shouldapply the standard of the ordinary man for deciding whether the transaction inquestion was a contract for service or for transfer of a right to use deemedgoods. The obligation of the service provider is merely to transmit voice andthe subscriber was not interested in stipulating as to how the voice/data is to beconveyed to the other end.
The Union of India has supported the service providers and contended that thetransaction in question was only "service".
R
ESPONDENTS
C
ONTENTION
 
The respondents, i.e., the States, raised a preliminary objection contending thatthe plea of the petitioners is barred by
res judicata
 because the issue has beendecided by the Apex Court as above stated in
State of U P v. Union of India(2003) 130 STC 1 (SC)
.
 
The respondents contended that the transaction was a deemed sale under Article 366(29A)(d) of the Constitution, i.e. a tax on the transfer of the right touse any goods for any purpose read with the charging sections in their varioussales tax enactments and, therefore, they are competent to levy sales tax on thetransactions.
It is further emphasised that Sub-clause (d) also use the words “for any purpose". This could include the purpose of service. In any event, it issubmitted, the meaning and scope of Sub-clause (d) in Article 366(29A)cannot be limited on account of the fact that a transaction may have beendescribed as a service in any legislative enactment or contract or licence.
It was submitted that the test of dominant object of a composite works contractwas no longer relevant after the 46th Constitutional Amendment. It wassubmitted that the service providers transfer the right to use radio frequency3

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