2011-TIOL-731-HC-AP-ST

IN THE HIGH COURT OF ANDHRA PRADESH

TAX REVISION CASE Nos.53 of 2007; 80, 106, 181 AND 245 of 2008
WRIT PETITION Nos.18723, 19704
19705, 20907 AND 28394 of 2007
7869, 7873, 9464, 9829, 13741
19138, 19139, 19140, 20931, 20989
20990, 22387 AND 22861 of 2008; 718, 737
1016, 2259, 2575, 2580, 2645, 3095
3123, 3442, 4056, 7854, 10743
11053, 16341, 16342, 16343
16875, 17675, 18914 AND 29189 of 2009
1526, 1578, 1579, 5710, 5721, 13555
13556, 21494, 32471 AND 32829 of 2010
AND 2428, 2429 AND 2430 of 2011

THE STATE OF ANDHRA PRADESH

Vs

M/s BHARAT SANCHAR NIGAM LTD, HYDERABAD

VVS Rao and Ramesh Ranganathan, JJ

Dated: September 08, 2011

Appellant Rep by: Sri A V Krishna koundinya, Learned Special Standing Counsel for
Commercial Taxes
Respondent Rep by: Sri R S Murthy

APVAT/Service Tax - 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 – not taxable under VAT

Telephone instruments, mobile handsets, modems and Caller ID instruments

are "goods" both under Article 366(12) of the Constitution of India and Section
2(16) of the Act.

In case these goods are sold or supplied to the subscribers by the service
providers such " sale" or the “transfer of the right to use these goods” would
be liable to tax either under Section 4(1) or Section 4(8) of the Act.

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, then such deposits, not being " goods”, cannot be brought to
tax under the Act.

If, however, the refundable deposits are for supply of telephone instrument,
hand set etc., which are "goods" and it is established that the deposits are a
disguised form of sale consideration, then these refundable deposits may also
form part of the sale consideration under Section 2(29)(b) of the Act, and
would be chargeable to tax under Section 4 thereof.

Petitions allowed

Case law referred:

1. Bharat Sanchar Nigam Ltd v. Union of India - 2006-TIOL-15-SC-CT-LB

2. The State of Madras v. Gannon Dunkerley & Co - 2002-TIOL-493-SC-CT-LB

3. T.N. Kalyana Mandapam Association v. Union of India - 2004-TIOL-36-SC-ST

4. Builders' Assn. of India v. Union of India - 2002-TIOL-602-SC-CT

5. Association of Leasing and Financial Service Companies v. Union of India -

2010-TIOL-87-SC-ST-LB

6. IDEA Mobile Communication Ltd. v. C.C.E & C., Cochin - 2011-TIOL-71-SC-ST

7. Tata Consultancy Services v. State of Andhra Pradesh - 2002-TIOL-403-SC-CT

8. Associated Cement Companies Ltd. v. Commissioner of Customs - 2002-TIOL-08-

SC-CUS

9. T.T.G. Industries Ltd. V. CCE - 2004-TIOL-49-SC-CX

JUDGEMENT

Per: Ramesh Ranganathan:

1. Declaration of the law by the Supreme Court, in Bharat Sanchar Nigam Ltd v. Union of
India (2006) 3 SCC 1) = 2006-TIOL-15-SC-CT-LB, notwithstanding, we are now called upon, in
this batch of Writ Petitions, to adjudicate on the jurisdiction of the
revisional/appellate/assessing authorities to levy tax under Section 4(1) and (8) of the
A.P. VAT Act, 2005 (hereinafter referred to as the Act) on SIM cards - pre-paid and post-
paid; recharge coupons; value added services; telephone instruments, mobile handsets,
modems and caller ID instruments; mobile telephone rentals; sharing of infrastructure;
non-refundable deposits; refundable deposits etc.
2. T.R.C. Nos.53 of 2007 and batch are preferred by the State of Andhra Pradesh against
the orders of the Sales Tax Appellate Tribunal, Hyderabad (hereinafter called “STAT”)
holding that telephone instruments were merely end devices of the system; there was
no material to show that rental charges were levied for use of handsets; and no finding
could 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 petitioners-service providers and their distributors. Sri A.V.
Krishna koundinya, Learned Special Standing Counsel for Commercial Taxes, appeared
on behalf of the State Government. Sri A. Rajasekhar Reddy, Learned Special Standing
Counsel, appeared on behalf of the Customs and Central Excise Department. Written
submissions were also submitted by M/s. Lakshmi Kumaran and Sridharan, Sri A.K.
Jaiswal and Sri R.S. Murthy.

5. Before examining the rival contentions, on the validity of the

revisional/appellate/assessment orders levying tax on different items supplied/provided
by the service providers to their subscribers, it is necessary to understand how a cellular
or a mobile telephone works. A large area, say a city, is divided into small cells and this
enables two persons connected to a cell system to communicate with each other. That is
why the term – “cell mobile phone” or “cell phone”. A person using a phone in one
cell of the division is plugged to a central transmitter which receives the signal and
diverts it to the other phone to which the call/message is intended. When the person
moves from one cell to another in the same city, or from one division to another, the
Mobile Telephone Switching Office (MTSO) automatically transfers signals from one
tower to another. All cell phone service providers have special codes dedicated to them
which are intended to identify the phone's owner and the service provider. System
Identification Code (SID) is a unique 5-digit number that is assigned to each carrier by
the licensor. Electronic Serial Number (ESN) is a unique 32-bit number programmed into
the phone when it is manufactured. A Mobile Identification Number (MIN) is a 10-digit
number derived from the cell phone number given to a subscriber. The SID, on the
control channel, is a special frequency used by the phone and the base station. Along
with the SID the mobile handset also transmits a registration request and the MTSO,
which keeps track of the phone's location in a database, knows which cell phone is being
used. When the MTSO gets a call, intended for one cell phone, it looks up the database
and diverts the call to that cell phone picking up the frequency pair used by the receiver
cell phone. When a cell phone is used the central antenna/central transmitter at the
MTSO and the transmitters in other areas are co-ordinated with the cell phone in a
fraction of 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 instrument all on airwaves.

Let us now examine each of the transactions, which have been subjected to tax under
the Act, item wise.

SIM CARDS :

6. It is contended on behalf of the petitioners – service providers that the use/utility of

the SIM card remains the same in both prepaid and postpaid connections; in the case of
a pre-paid SIM card, service charge is collected mainly for activating the connection;
service tax is paid on this consideration as “telecommunication service”; a SIM card is
incidental to the rendering of telecommunication service; SIM cards are not sold by the
service provider to the subscribers, and are not chargeable to tax under Section 4(1) of
the Act; even if it is held that SIM cards are "goods" and it is sold, the price charged for
the Starter Kit does not constitute the sale consideration; sales tax is sought to be
imposed even on the activation charges component of the value of a Starter Kit though it
does not amount to"sale"; activation charges in the Starter Kit, pertaining to non-
SIM/ROIM card based service (CDMA mobile instrument connection), is only a charge for
service; post-paid SIM card charges, which represent the call charges collected by the
petitioners from their subscribers, cannot be subjected to tax as there is no sale/deemed
sale of goods; and, in any event, the purchase price of the SIM card in the hands of the
petitioner, and a reasonable profit thereon, can alone be brought to tax under the Act.

7. On the other hand it is contended on behalf of the revenue that, while the SIM card
enables access to the cellular network, it can also store data of phone calls, contact
numbers, games, music etc; it is capable of being bought and sold; it has utility; it is
capable of being transferred, delivered and stored; SIM cards have all the attributes of
"goods", and can be subjected to"sale"; pre-paid SIM cards are sold to customers,
through distributors, for a price; the charges collected from the subscriber are for the
SIM card; they are not collected for the service of activating the SIM card; SIM cards are
not activated at the time of their sale to the distributors; and the amounts collected for
issue of prepaid SIM cards, and rentals for postpaid SIM cards, represent the
consideration for"sale" and “deemed sale” respectively.

8. It is essential, at the outset, to understand what a SIM card represents. A Subscriber

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) = 2006-TIOL-15-SC-CT-LB.

9. Section 4 of the Act relates to charge to tax and, under sub-section (1) thereof, every
dealer shall be liable to pay tax on every sale of goods. Under Section 4(8) every VAT
dealer who transfers the right to use goods taxable under the Act, for any purpose
whatsoever, shall pay a tax for such goods. Schedule IV of the Act lists "goods" taxable
at 4%. Listed under Entry 2 thereof are goods of tangible or incorporeal nature and
include, under sub-entry (xi), SIM cards used in mobile phones.

10. Under the law relating to sale of goods there cannot be an agreement relating to one
kind of property, and a sale as regards another. On a true interpretation of the
expression "sale of goods" there must be an agreement between the parties for the
sale of the very goods in which property eventually passes. (The State of Madras v.
Gannon Dunkerley & Co (1959 SCR 379) = 2002-TIOL-493-SC-CT-LB. Even prior to the forty
sixth amendment to the Constitution, it was possible for parties to enter into distinct and
separate contracts, one for the transfer of goods and the other for remuneration for
services. In such cases there are really two agreements, though there is a single
instrument embodying them, and the power of the State to separate the agreement to
sell, from the agreement to render service, and to impose sales tax thereon cannot be
questioned. (Gannon Dunkerley & Co (1959 SCR 379) = 2002-TIOL-493-SC-CT-LB. What are
"goods" in a sales transaction remains, primarily, a matter of contract and intention. The
seller and the 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 intelligence. (Bharat
Sanchar Nigam Ltd. (2006) 3 SCC 1) = 2006-TIOL-15-SC-CT-LB. It is only if the parties to the
agreement intend to sell and buy the “SIM” card for what it is, and not what it is
intended for, can it be said that “ SIM ” cards are the "goods" which are the subject
matter of sale. If the intention of the parties, as envisaged in the agreement, is to buy
and sell the SIM card per se, and not for activating the subscribers mobile telephone and
thereby connect it to the service provider's network, the SIM 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 transfer of title in the goods. In
the absence of any one of these elements there is no"sale". (Bharat Sanchar Nigam Ltd.
(2006) 3 SCC 1) = 2006-TIOL-15-SC-CT-LB ; Gannon Dunkerley & Co. 1959 SCR 379) = 2002-
TIOL-493-SC-CT-LB.

13. The classical concept of sale, enunciated in Gannon Dunkerley & Co. 1959 SCR
379 = 2002-TIOL-493-SC-CT-LB, has survived the Forty-sixth Constitutional Amendment in two
respects. First with regards the definition of"sale" for the purposes of the Constitution in
general, and for the purposes of Entry 54 of List II of the VII Schedule to the
Constitution in particular, except to the extent that the clauses in Article 366(29-A)
operate. Even after separate categories of “deemed sales” were introduced by the
forty-sixth amendment to the Constitution, the meaning of the word "goods" was not
altered. The composite elements of a sale, such as intention of the parties, goods,
delivery, etc, continue to be defined according to known legal connotations. The second
is with reference to the dominant nature test to be applied to a composite transaction.
Transactions which are mutant sales are limited to the clauses of Article 366(29-A). The
sale element of those contracts, covered by the six sub-clauses of clause (29-A) of
Article 366, are alone separable and can be subjected to sales tax by the States under
Entry 54 of List II. The dominant nature test would not apply to such deemed sales. 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. (Bharat Sanchar Nigam Ltd.
(2006) 3 SCC 1) = 2006-TIOL-15-SC-CT-LB. For the tax to amount to a tax on the sale of
goods, it must amount to a"sale" according to the established concept of"sale" in the
Law of Contract or the Sale of Goods Act, 1930. The Legislature cannot enlarge the
definition of"sale" so as to bring within the ambit of taxation transactions which cannot
be a"sale" in law. (T.N. Kalyana Mandapam Association v. Union of India (2004) 5 SCC
632 = (2004-TIOL-36-SC-ST). If there is an instrument of contract which is composite in form,
in any case other than the exceptions in Article 366(29-A), then, unless the transaction
represents two distinct and separate contracts and is discernible as such, the States
would not have the power to separate the “agreement to sell ” from the “agreement
to render service” and impose tax on the"sale". The test for composite contracts, other
than those mentioned in Article 366(29-A), continues 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) = 2006-TIOL-15-SC-CT-LB. 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 charged for the Starter Pack, and a substantial
portion thereof is for services rendered by the service provider for activating the
subscriber's mobile telephone, and for services provided consequent thereto. If the
instrument of contract which is composite in form does not contain two separate
agreements which are discernable as such, the dominant nature test would then apply
and, as the dominant intention of supplying the Starter Kit is to activate the subscriber's
mobile phone and connect it to the service provider's net work enabling the latter to
render services, the incidental element of sale of the SIM card cannot result in the SIM
card being charged to tax under the Act.

14. Under Explanation IV of Section 2(28) of the Act the transfer of the right to use any
goods for any purpose shall be deemed to be a"sale". The Forty Sixth amendment to the
Constitution introduced a fiction by which six instances of transactions were treated as
“deemed sale of goods”. (Bharat Sanchar Nigam Ltd. (2006) 3 SCC 1) = 2006-TIOL-15-SC-
CT-LB. When the law creates a legal fiction, such fiction should be carried to its logical
end. If the power to tax a sale, in an ordinary sense, is subject to certain conditions and
restrictions imposed by the Constitution, the power to tax a transaction which is deemed
to be a sale under Article 366(29-A) of the Constitution should also be subject to the
same restrictions and conditions. (Builders' Assn. of India v. Union of India (1989) 2 SCC
645) = 2002-TIOL-602-SC-CT. The said definition, as to deemed sales, will have to be read in
every provision of the Constitution wherever the phrase “tax on sale or purchase of
goods” occurs. (Bharat Sanchar Nigam Ltd. (2006) 3 SCC 1) = 2006-TIOL-15-SC-CT-LB. As the
intention of the parties to the agreement in these batch of Writ Petitions, (i.e., the
agreement between the service provider and the subscriber), is not to sell or buy a SIM
card for what it is, but to use it to activate the subscribers mobile telephone and connect
it to the service providers network, the SIM cards do not constitute "goods" and the
amount collected for issuing a post paid SIM card does not represent the consideration
for the transfer of the right to use the SIM card. The service, of activating the
subscribers cellular phone, cannot be treated as “deemed sales” under Article 366(29-
A)(d) of the Constitution of India or brought to tax under Section 4(8) of the Act. While
the States have the 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) = 2006-TIOL-15-SC-CT-LB; Association of Leasing and Financial Service
Companies v. Union of India (2010) 35 VST 549 (SC) = 2010-TIOL-87-SC-ST-LB; 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 = 2011-TIOL-71-SC-ST. The
question which arose for consideration, in “IDEA Mobile Judgment in Civil Appeal
No.6319 of 2011 dated 4.8.2011” =2011-TIOL-71-SC-ST , was whether the value of SIM cards,
sold by the service provider to their mobile subscribers, should be included as “taxable
service” under Section 65(105) zzzx of the Finance Act, 1994, (which provides for levy
of service tax on telecommunication service), or whether it is taxable as “sale of goods”
under the Sales Tax Act. The Supreme Court held that the charges paid by subscribers,
for procuring a SIM card, were generally processing charges for activating the cellular
phone which would, necessarily, be included in the value of the SIM card; the amount
received by the cellular telephone company from its subscribers, towards the SIM Card,
forms part of the taxable value for the levy of service tax; SIM cards are never sold as
goods independent of the services provided; they are considered part and parcel of the
services provided; the dominant intention of the transaction is to provide services, and
not to sell the material i.e., SIM Cards which, on its own but without the service, would
hardly have any value; the value of the SIM card forms part of the activation charges as
no activation is possible without a valid functioning of the SIM card; the value of the
“taxable service” is calculated on the gross total amount received by the operator from
the subscribers; and no element of sale is involved in the transaction.

16. In view of the law laid down by the Supreme Court, in Idea Mobile Communication
Judgment in Civil Appeal No.6319 of 2011 dated 4.8.2011 = 2011-TIOL-71-SC-ST , that the
value of the SIM card forms part of the activation charges, service tax can alone be
levied for such services, and not sales tax, the revisional/appellate/ assessing authorities
have exceeded their jurisdiction in levying tax on pre-paid and post-paid SIM cards.

RECHARGE COUPONS/VOUCHERS :

17. It is urged on behalf of the petitioners-service providers that recharge

coupons/vouchers are for extension of talk time/validity of the connection; they are also
incidental and integral to telecommunication service; the recharge coupon does not, by
itself, constitute "goods" and is not the subject matter of sale or purchase; the
agreement between the subscriber and the service provider is for extension of
talktime/validity period of the connection for extra consideration; this transaction itself is
not sale of goods, but only a facet of “telecommunication service”; the recharge
coupons are evidence of advance payment of consideration for receipt of services in the
future; the recharge coupons do not 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 appointment of distributors (called channel partners)
reveal that recharge vouchers, by themselves, do not ensure a correlative service from
the service providers unless the masked portion is scratched, and the PIN is punched to
enter the telecommunication network; only at that point of time is contact established
between the petitioner and the service receiver; the channel partner does not secure any
customer for himself while delivering the pre-paid vouchers; the channel partner does
not trade in "goods" or contract with his own customers, but receives the proceeds from
the existing subscribers of the service providers for extending their talk time; the coupon
is the medium employed by the service provider to reach the subscriber; a subscriber
follows the set of instructions on the coupon to secure access to the service provider's
network; the recharge coupon is meant to be of economic utility only to the subscriber;
and the sale value of recharge coupons, sold to distributors and subscribers in the State
of A.P, has been taken as the basis for taxation.

19. Entry 47, as inserted to Schedule IV of the Act, by G.O.Ms. No.175, Rev. (CT-II),
dated 18.02.2009 with retrospective effect from 18.11.2005, reads as under:

“Diaries, Calendars, annual reports, application forms, Stationary items like letterheads,
visiting cards, bill books, leaflets, flyers, folders, soft bound books, centre pinned books,
hard case books, computer stationery, posters, Brochures, CD/DVD Covers, visual aids,
danglers, streamers, envelopes, labels, telephone, recharge coupons, report cards,
Tickets, Cheque Books, Demand Drafts, Coupons and all kinds and classes of forms
including tender and bid documents and similar printed materials.”

20. A recharge coupon is a memorandum on a small card or piece of paper containing

certain digital arrangements or a number or a PIN. It is merely an operational instruction
given by the service provider to the subscriber to enable him to extend his
talktime/validity of the connection period. The purpose for which recharge coupons are
issued is that the number printed on it is used to access the network of the service
provider. Except for this purpose and use, the recharge coupon has no other utility. The
subscriber, after purchasing the recharge coupon, scratches the silver/black panel to
view an 18 digit secret code, then dials a particular number from 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 be ad idem on the subject matter
of the goods. In these cases the agreement between the parties is not to buy and sell
recharge coupons per se but for what it represents i.e., for the code number which it
carries and which in turn enables the subscriber to reactivate his connection to the
service provider's net work for a longer duration. Unlike a transfer of the right to use
"goods", under Article 366 (29A)(d) of the Constitution of India, the contract for"sale" of
recharge coupons cannot be bifurcated into one of sale of goods and the other for
rendition of telecommunication services. The “dominant intention test” would apply
and, as the very purpose of purchase and sale of the recharge coupons is for extension
of the talk time or the validity period which it represents and not for the “paper” or
“Card” on which it is printed, there is no"sale" of goods falling within the expression in
Section 2(28) of the Act. Consequently the transaction cannot be charged to tax under
Section 4(1) of the Act.

22. Even according to the Revenue, recharge coupons stand on the same footing as SIM
cards. As the Supreme Court, in IDEA Mobile Judgment in Civil Appeal No.6319 of 2011
dated 4.8.2011 = 2011-TIOL-71-SC-ST, has held that SIM cards are not "goods" liable to tax
under sales tax enactments, it must necessarily follow that recharge coupons cannot also
be brought to tax under the Act. Once it is held that recharge coupons are not liable to
tax under the Act, it matters little that the supply of recharge coupon is routed by the
service provider through several distributors before it reaches the subscriber.

23. Entry 47 of Schedule (iv) to the Act, as amended retrospectively with effect from
18.11.2005, includes “coupons” and “cheque books”. If, for example, a cheque leaf
which costs Rs.2/- to print is used to draw Rs.1.00 lakh from the bank, it would defy
reason if the “cheque” is treated as "goods", its sale value as Rs.1.00 lakh, and is
brought to tax as"sale" under the Act. Likewise the recharge coupons which may have
costed the service provider less than Re.1 to have it printed, cannot be brought to tax
for the value mentioned therein which may range from Rs.10/- to several thousand
rupees. What Entry 47 of Schedule IV represents is sale of the recharge voucher, to the
service provider, and not the transaction between the service provider and the
subscriber even if, in the process, the 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 several service providers who have been
levied tax on the monthly rentals charged on post-paid SIM cards; the department has
itself stopped levying sales tax on telephone rentals from the assessment year 2005-
2006 onwards, and such levy for the assessment years upto 2004-2005 is illegal.

25. On the other hand, it is contended on behalf of the Revenue that monthly rentals are
collected towards the SIM card; effective control and possession of the post paid SIM
card vests with the subscriber, and not the service provider; the subscriber uses the SIM
card at his convenience; irrespective of how the subscriber uses the SIM card, he needs
to pay fixed monthly charges towards its use; this payment is for the transfer of the
right to use the SIM card; and the transfer of the right to use a post paid SIM card is a
“deemed sale”.

26. The monthly rentals charged by the service provider, as fixed monthly commitment
charges which every post paid subscriber has to pay, is contended by the Revenue to
form part of the consideration for transfer of the right to use “SIM cards”. As noted
hereinabove, under the sub-head “SIM cards”, SIM cards are not "goods" on which tax
can be levied under the Act. As rentals are charged each month on post-paid SIM cards,
and as “monthly rentals” constitute the consideration received by the service provider
for rendering “telecommunication services ”, such monthly rentals cannot be
subjected to tax under the Act.

The impugned orders passed by the revisional/appellate/assessing authorities, levying

tax on monthly rental collected for post paid SIM cards, is without jurisdiction and is
illegal.

VALUE ADDED SERVICES :

27. It is the case of the petitioners-service providers that SIM/RUIM card based
connections, CDMA or WILL or any other kind of connections/extensions/talk
time/validity period, RCVs, EVDs, VAS etc., are all services, rendered by the service
provider to their subscriber, integral or incidental to “telecommunication service”;
software, in value added services, is transferred only telegraphically/telephonically by
the use of, and by means of, a telegraph line/telephone connection; value added
services involve transmission and receipt of messages i.e., textual, audio and visual
data, and are ultimately a form of communication under Entry 31 List I of the VII
Schedule read with Section 3(3) of the Indian Telegraph Act; incorporation 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 the destination of the subscriber; the entirety of
the telecommunication process is a “service” under the agreement between the service
provider and the subscriber; one entire and indivisible contract of telecommunication
cannot be broken down so as to isolate an element as the “sale of goods”; value added
services, including SMS & MMS etc, represent airtime; ring tones etc., are not contained
in any tangible media at the time of sale, and are not "goods"; electromagnetic waves
are only the medium or the means of communication for transmission of signals, or
carriage of messages; the software used in “value added services” are not "goods",
and there is neither transfer nor sale of goods.

28. On the other hand it is contended on behalf of the Revenue that Value added
services include downloading of music, ring tones, wall papers, games etc; after they are
saved by the subscriber on his mobile, they become his property; they can be used,
transmitted or deleted at his will; these down loaded products are intangible goods; the
dealer, selling these goods through the mobile, collects charges; this constitutes sale of
goods which is liable to tax under the Act; and value added services, to the extent of
down loads, (excluding SMS, MMS, voice messages etc.,), are liable to tax under the Act
as they are intangible goods; they are not incidental to telecommunication service, but
have a value of their own; the amount received, for value added services, is the sale
proceeds received for downloading of songs, games etc.; the proceeds received from
value added services are towards supply of software; “software” are "goods"; the
service provider sells these software products through his mobile network; they are sold
online; this constitutes sale of products liable to tax as intangible software applications;
and the supply of the software of value added services, and installation charges
received, are taxable under Entry 2 of the IV Schedule to the Act.

29. The words “message”, “telegraph” and “telegraph line” are defined in the Indian
Telegraph Act, 1885. „Message' is defined therein to mean any communication sent by
telegraph, or given to a telegraph officer to be sent by telegraph or to be delivered.
“Telegraph” is defined to mean any appliance, instrument, material or apparatus used
or capable of use for transmission or reception of signs, signals, writing, images, and
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
first proviso to sub-section (1) of Section 4 of the Indian Telegraph Act. The license
conditions, of the licence granted to each of the service providers in these batch of writ
petitions, interdict the licensee from assigning or transferring his rights, under the
licence, to a third party. The licence given to a service provider is one for providing
telecommunication service, and not for the supply of goods or transfer of the right to use
goods. The integrity of the licence can neither be broken nor can the telecommunication
service rendered by them be so mutilated. Not only does this position flow from the
terms of the contract, this also flows from Section 4 of the Indian Telegraph Act which
provides for grant of licence. The transaction of service is a composite one, and is not
capable of being disintegrated. (Bharat Sanchar Nigam Ltd. (2006) 3 SCC 1) = 2006-TIOL-
15-SC-CT-LB. Section 2(j) of the TRAI Act defines „service provider' to mean the
Government as a service provider, and includes a “licensee”. Section 2(k) defines
„telecommunication service' to mean service of any description (including electronic
mail, voice mail, data services, audio text services, video text services, radio paging and
cellular mobile telephone services) which is made available to users by means of any
transmission or reception of signs, signals, writing, images and sounds, or intelligence of
any nature, by wire, radio, visual, or other electro-magnetic means.
30. Section 65(109a) of the Finance Act, 1994 defines “telecommunication service” to
mean service provided by means of any transmission, emission or reception of signs,
signals, writing, images and sounds or intelligence or information of any nature by wire,
radio, optical, visual or other electro-magnetic means or systems and to include voice
mail, data services, audio tax services, video tax services, fixed telephone services,
cellular mobile telephone services, carrier services, and provision of call management
services. Section 65(105)(xxxx) defines “taxable service” to mean any service
provided, or to be provided, to any person in relation to telecommunication service.
Section 65 (36c) defines “development and supply of content” to include
development and supply of mobile value added services, music, movie clips, ring tones,
wall paper, mobile games, data, whether or not aggregated, information, news and
animation films. Section 65(105)(zzzzb) 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) = 2006-TIOL-15-SC-CT-LB.

32. The service provider provides a variety of value added services as are permitted
under the agreement. Short Message Service ( SMS ) is a text messaging service
component of a mobile communication system using standardized communication
protocols that allow exchange of short text messages between devices. The term SMS is
used as a synonym for all types of short text messaging. Most SMS messages are
mobile-to-mobile text messages. Ring tones are created, put into a unique file format
and sent to the subscriber's phone via SMS.

33. Value added services, like ring tones and music downloads, are audio messages, and
the manner of their transmission from the service provider to the subscriber, or from one
subscriber to another, is by electro-magnetic waves. Wall paper, like SMS/Text
messages, are visual images. The process of transmission of voice messages is identical
to the transmission of data in non-voice messages. Sounds or images are converted into
electro-magnetic waves, transmitted through the network of cell towers and servers of
the service provider, and are received by the person to whom it is intended in his
handset. The mobile handset is both a transmitter and a receiver. Information
transmitted/ received by a mobile phone, be it audio or visual, is only by means of
electro-magnetic waves. VAS involves only a transfer of data (textual, audio, visual etc.)
and/or accessibility (ability to access) of such data or content in the network of the
service provider. “Value added services” fall within the ambit of “telecommunication
services” as defined in Section 2(k) of the TRAI Act and Section 65(109a) of the
Finance Act, 1994. Ringtones, music downloads, wall paper, music clips etc., fall within
the definition of “development and supply of content” under Section 65 (36c) and
constitute “taxable service” under Section 65(105)(zzzb) of the Finance Act, 1994.

34. Even otherwise it is only if “ value added services ” such as ring tones, wall
papers, games etc., constitute "goods" can their sale/deemed sale be brought to tax
under the Act. Section 2(7) of the Sale of Goods Act, 1930 defines "goods" to mean
every kind of moveable property other than actionable claims and money, and to include
stock and shares, growing crops, grass, and things attached to or forming part of the
land which are agreed to be severed before sale, or under the contract of sale. The
definition of "goods" under the Sale of Goods Act is similar to the definition of "goods"
under Section 2(16) of the Act. The 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 Consultancy Services v. State of Andhra Pradesh (2000) 137
STC 620) = 2002-TIOL-403-SC-CT. Intellectual property, when it is put on a physical medium,
becomes goods. The moment copies are made of a software programme, loaded onto
discs, cassettes etc., and are marketed as such, they become "goods" liable to sales tax.
Sale is not just of the media which, by itself, has very little value. The buyer purchases
the intellectual property on the media, and not merely the media independent of the
intellectual property i.e. the paper or cassette or disc or CD. Software, recorded in a
physical form, becomes inextricably intertwined with, or part and parcel of the corporeal
object upon which it is recorded, be it a disc, tape, hard drive or other device. A sale of
computer software, recorded in a physical form, is sale of "goods" within the meaning of
the term as defined in the Sales Tax Act. (Tata Consultancy Services (2000) 137 STC
620) = 2002-TIOL-403-SC-CT; Associated Cement Companies Ltd. v. Commissioner of Customs
2001(4) SCC 593) = 2002-TIOL-08-SC-CUS “Value added services”, even if they are held to
be software, do not constitute "goods" as they are not recorded in a physical medium
before they are marketed or sold, but are merely transmitted through electro-magnetic
wages. The process of sending a signal is that it is superimposed on a carrier current or
wave by means of a process called modulation. Signal modulation can either
be analog or digital. (Bharat Sanchar Nigam Ltd. (2006) 3 SCC 1) = 2006-TIOL-15-SC-CT-LB;
David Gilles & Roger Marshal: Telecommunications Law : Butterworths). The transfer of
software to the subscriber or to his mobile instrument takes place only telegraphically by
the use and by means of a telegraph line/electro-magnetic waves. The transfer does not
take place by means of downloading the software from a physical medium (i.e., floppy,
disk etc.,) provided by the service provider, into the subscriber's instrument. All value
added services involve transmission and receipt of messages i.e., textual, audio & visual
data. The service providers carry messages. They are only carriers, and do not have
property over the message they carry. This method of carriage of the message is
carriage of goods, and not a transfer of the right to use goods, if any. ( Bharat Sanchar
Nigam Ltd. (2006) 3 SCC 1) = 2006-TIOL-15-SC-CT-LB. Transmission of messages, by the
service provider to the subscriber, is by means of Electro-magnetic waves. A subscriber
to a telephone service 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) = 2006-TIOL-15-SC-CT-LB.

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) = 2006-TIOL-15-SC-CT-LB. Providing access or telephone
connection does not put the subscriber in the possession of “electromagnetic waves.”
In a sale of goods the user would be of the thing or goods delivered. The delivery may
not be simultaneous with the transfer of the right to use. But the goods must be in
existence and deliverable when the right is sought to be transferred. “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 a medium of communication. What is transmitted is not an
electromagnetic wave but the signal through such means. The signals are generated by
the subscribers themselves. In telecommunication what is transmitted is the message by
means of the telegraph. No part of the telegraph itself is transferable or deliverable to
the subscriber. Electromagnetic waves are neither abstractable nor capable of delivery.
An electromagnetic wave (or radio frequency) does not fulfil the parameters, in Tata
Consultancy (2000) 137 STC 620) = 2002-TIOL-403-SC-CT, to constitute “goods”, the right to
use of which would be a"sale". “Electromagnetic waves” are not “goods” within the
meaning of the word either in Article 366(12) or in the State legislations. Even for the
purposes of Article 366(29-A)(d) "goods" do not include “electromagnetic waves” or
“radio frequencies”.(Bharat Sanchar Nigam Ltd. (2006) 3 SCC 1) = 2006-TIOL-15-SC-CT-LB.
“Value added services ” are not recorded in a physical medium before they are
marketed. They are merely messages carried by means of Electro-magnetic waves. Both
“ Software ” which is not recorded on a physical medium before it is marketed, and
“ Electro-magnetic waves ” through which audio and visual messages/signals are
transmitted, are not "goods" liable to tax under the Act. Levy of tax on value added
services, either under Section 4(1) or 4(8) of the Act, by the
revisional/appellate/assessing authorities concerned is without jurisdiction and is illegal.

SHARING OF INFRASTRUCTURE :

36. Counsel for the petitioners submit that the service providers enter into agreements
with various other service providers for use by them of various kinds of infrastructure;
there is no transfer of the right to use the equipment; there is no deemed sale under
Article 366(29A); the towers are permanent industrial structures and constitute
“immovable property”; and, as they are not "goods", no tax can be levied on them
under the Act.

37. On the other hand it is the case of 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 for consideration constitutes a transfer of the right to use such facility/goods;
the towers were erected at various places, mostly on rented/leased premises; on
termination of the lease, the towers have to be dismantled and taken out; the purpose
and method of annexation of the tower is temporary, and for a limited period; the tower
is movable property; and likewise the equipment provided at the site of the tower are
movable property and, hence, "goods".

38. For providing telecommunication services, the service providers interconnect their
networks with various other operators by inter-connection agreements. The calls
generated from one network travels through various networks before they reach the
ultimate called party. Telecommunication involves not only the network of one particular
operator, but several cellular operators for carriage and termination of the call. The
whole network system constitutes the telecommunication network either of one operator
or collectively of various operators through which telephone services are provided by
telephone operators to their subscribers.

39. Service providers erect towers on sites (either land or roof tops of buildings), for
their network operation. As part of their network, other assets like shelter, air
conditioning equipment, diesel generator, electrical wiring, power plant etc are also
provided. The structural towers are rooted to the ground with a height of upto 90
metres. Antennas are fixed on the tower to receive and transmit messages. On a
reciprocal basis, other service providers are permitted to fix their antennas on the tower,
and share the infrastructure namely the other equipment, against monthly payment
described as “Infrastructure Share Fee”. Other cellular operators are permitted to
bring their own equipment, like BTS, access radio etc., and station such equipment at
the site. Each site has a minimum lock in period of 3 years. Apart from the antenna fixed
on the tower by the beneficiary party, the entire infrastructure is under the control,
possession and maintenance of the passive service provider.

40. The service provider, who erects the tower and locates various equipment thereat, is
called the PASSIVE INFRASTRUCTURE SERVICE PROVIDER. Under the
„infrastructure sharing agreement' entered into with various other cellular operators,
the PASSIVE INFRASTRUCTURE SERVICE PROVIDER shares its infrastructure 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 authority is
required to regulate arrangement amongst service providers for sharing their revenue
derived from providing telecommunication services. The consideration, for infrastructure
sharing, is arrived at between the parties on the basis of capital expenditure (CAPEX)
and Operational expenditure (OPEX) sharing at agreed ratios/parameters. These
expenses are collected from each of the other service provider by raising invoices.

41. The Telecommunication tower, of a height of around 90 metres and embedded either
to the earth or to the roof top of a building, is under the control and possession of the
passive service provider. The manner in which this 90 metre huge structure is fastened
would necessitate its being excluded from the ambit of "goods", and included within the
category of “immovable property”. Transfer of the right to use “immovable
property” would not fall within the ambit of Section 4(8) of the Act as “immovable
property” is excluded from the definition of "goods" under Section 2(16) of the Act.
Section 3(26) of the General Clauses Act, 1897 includes, within the definition of the term
“immovable property”, things attached to the earth or permanently fastened to
anything attached to the earth. Section 3 of the Transfer of Property Act gives the
following meaning to the expression “attached to the earth”: (a) rooted in the earth,
as in the case of trees and shrubs; (b) imbedded in the earth, as in the case of walls or
buildings; or (c) attached to what is so imbedded for the permanent beneficial
enjoyment of that to which it is attached. The question whether a chattel is imbedded in
the earth so as to become “immovable property” is to be decided on the principles of
annexation to the land. The twin tests are the degree or mode of annexation, and the
object of annexation. (Solid and Correct Engineering Works v. CCE (2010) 5 SCC
122. From a combined reading of the definition of “immovable property”, in Section 3
of the Transfer of Property Act and Section 3(26) of the General Clauses Act, it is evident
that, in an immovable property, there is no mobility. The test of permanency is whether
the chattel is movable to another place of use in the same position, or is liable to be
dismantled and re-erected at the latter place? If the answer is yes to the former it must
be a movable property and, thereby, it must be held that it is not attached to the 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 (DB) = 2004-TIOL-49-SC-CX; 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"sale"
to the extent stated, but no further. (20th Century Finance Corpn. Ltd. v. State of
Maharashtra (2000) 6 SCC 12).

43. As a telecommunication tower is “immovable property” it does not stand to reason

that a part of it, where a beneficiary party fixes its antenna, would become "goods".
Even if the other equipment located near the tower are held to be "goods", merely by
permitting other cellular operators to use, or in giving them access, to identified assets
does not involve any transfer of the right to use such assets, as control and possession
of these equipment always remains with the service provider who owns them, and there
is no transfer of either control or possession of the equipment in favour of other cellular
operators. The distinction, between mere use of "goods" and “ transfer of the right to
use goods ”, must be borne in mind. What the co-service providers are permitted is use
of the equipment provided at the site of the tower by the passive service provider. Such
usage by them is along with the passive service provider, and other service providers
also. Effective control and possession of such equipment continues to remain with the
passive service provider, and is not parted to the other service providers who are merely
permitted to use these equipment.

44. Though there is user of the equipment on a sharing basis there is no transfer of the
right to use these goods and, as such, would not constitute “deemed sales” either
under Article 366 (29A)(d) of the Constitution of India or under Explanation IV to Section
2(28) of the Act. Such sharing of infrastructure is incidental to, and a means of,
rendition of “telecommunication service”. The impugned orders passed by the
revisional/appellate/assessing authorities, levying tax on the proceeds received by the
passive service provider on sharing their infrastructure equipment with other service
providers, treating it as"sale" under Explanation (iv) to sub-section (2) of Section 28 of
the Act, is without jurisdiction and is illegal.

TELEPHONE INSTRUMENTS, MODEMS AND MOBILE HANDSETS :

45. It is contended on behalf of the petitioners that telephone instruments are not sold;
they are provided to customers free of charge as a part of the end equipment, and no
charges are collected for the instruments; customers have the option to have their own
instruments, in which case they are allowed rebate 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 department can levy tax only to the extent of the
cost of the handset, and not beyond.

46. On the other hand it is contended on behalf of the Revenue that a handset is
installed at the premises of the subscriber for which monthly rent is collected; similarly a
modem is installed, and rent is collected, when the subscriber requires an internet
connection; there is a right to use "goods" in the case of landline connections; handsets
and modems are issued for the use of the subscriber which constitutes a transfer of the
right to use "goods"; effective control and possession of the handset and modem rests
with the subscriber, and not the petitioner; installation of instruments in the premises of
the subscriber meant that possession was with him; monthly rentals are charged for the
handset; the contract for providing landline or broadband service may be a composite
one, but amounts are being collected separately for providing the instruments; in the
case of a broadband connection, a fixed amount is charged towards the modem, and
again separate additional amounts are collected depending on the usage of the
broadband connection; fixed charges are collected towards transfer of the right to use
the handsets and modems; and handsets and modems, issued to the subscriber, involve
a transfer of the right to use "goods" which are taxable.

47. The concept of"sale" in a subscriber's mind would be limited to the handset that may
have been purchased for the purposes of getting a telephone connection. That, and any
other accessory supplied by the service provider, alone remain to be taxed under the
State sales tax laws. (Bharat Sanchar Nigam Ltd. (2006) 3 SCC 1) = 2006-TIOL-15-SC-CT-
LB. Modems are necessary to avail access to the broad band service. Modems are
provided to customers who are given the option of paying either fixed monthly charges
or the full cost of the modem. Telephone instruments, mobile handsets and modems are
"goods". If the service provider has sold these goods to the subscriber, then such"sale"
is liable to tax under Section 4(1) of the Act. If, on the other hand, the service provider
has supplied telephone instruments, mobile handsets, and modems to the subscriber for
their use, it would then amount to a transfer of the right to use these "goods" both
under Article 366(29A)(d) of the Constitution of India and under Section 4(8) of the Act,
as such supply results in a transfer of 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. Even in cases where there is a transfer of the right to use "goods" what
can be brought to tax under the Act is only on value of such transfer of the right to use
such "goods" and not on “telecommunication services” which the service provider
also renders to the subscriber.

48. In cases where the subscriber purchases a telephone instrument, mobile handset or
modem from a vendor other than the service provider, there cannot be any sale of goods
or transfer of the right to use such goods by the service provider to the subscriber, and
levy of sales tax on “telecommunication services” rendered by the service provider,
and utilized by the subscriber through these "goods" which he has purchased elsewhere,
would be illegal.

49. To the limited extent that telephone instruments, mobile hand sets and modems are
either sold or supplied by the service provider to the subscriber, the
revisional/appellate/assessment orders levying tax thereupon must be upheld, provided
the consideration brought to tax does not include the service element of such a
composite transaction of sale and service. The revisional/appellate/assessing authorities
shall pass orders afresh, after putting the petitioners-service providers on notice and
giving them opportunity of being heard, in the light of the observations made
hereinabove.

CALLER ID INSTRUMENT :

50. Counsel for the petitioners submit that service charges are levied for providing caller
ID instrument, and are included in the monthly bills; leased line circuits are made
available to the customers on their specific request; these lines are distinct and different
from the usual land lines; rentals are collected only for the service provided to the
customer; and applicable service tax is also collected from them.

51. On the other hand it is the case of the Revenue that the petitioners have installed
such caller identity equipment fitted to land-lines wherever the customer has so
requested; they have been collecting rental charges for the same; such amounts
charged, in respect of sales and on account of rentals on such caller identity equipment,
constitute "goods" and are taxable under the Act.

52. The Calling Line Identification Presentation (CLIP) facility was introduced w.e.f.
1.1.99. The device or instrument, for availing CLIP facility, is the Caller I.D. instrument.
The Caller ID instrument, procured by the subscriber and 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
"goods"; there is no element of"sale" involved in taking such security deposit; and levy
of sales tax thereon is illegal.

55. On the other hand, it is contended on behalf of the Revenue that deposits are
received by the service providers against supply of telephone instruments, batteries,
accumulators etc which are purchased from outside the State; these deposits become
part of the common till, and are utilized by the service providers for their business; the
customer applications form define the deposit as a charge; such deposits, received for
supply of terminal equipment, network interfacing units etc., constitute the sale
consideration; the service provider is not under any contractual obligation to return the
deposit charged, and receive back the goods supplied; similarly the customer has not
been conferred any right to return the said equipment, and receive back the entire
deposit paid by him to the service provider; and these transactions amount to “deemed
sale” under Sec.4(8) of the Act.

56. Section 2(29)(b) of the Act defines „sale price' to mean the total amount of
consideration for the sale or purchase of goods as may be determined by the assessing
authority, if the tax invoice or bill of sale does not set out correctly the amount for which
the goods are sold. If, as contended by the petitioners, the non-refundable security
deposit is taken by the service provider, from their distributors, for supply of SIM cards
and Recharge coupons, then such deposits cannot be brought to tax either under Section
4(1) or Section 4(8) of the Act as neither SIM cards nor Recharge coupons, or for that
matter “non-refundable deposits” constitute "goods" nor is there any"sale" thereof. If
however, as is contended by the Revenue, non-refundable deposits are received against
supply of telephone instruments, batteries, accumulators etc., (which are "goods") then
they may well be a form of disguised consideration for the"sale" or the “transfer of the
right to use goods” and, as such, liable to tax under the Act.

57. The questions which fall for consideration is what is the purpose for which this non-
refundable deposit has been taken by the service provider; what the service provider has
supplied to their distributors/franchisees; and whether or not this deposit is a disguised
form of consideration for the"sale" or the “transfer of the right to use goods”. Since
the impugned 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 were collecting these deposits in the name of "refundable deposits" from
their customers who were availing land line connections, and fixed wireless telephones;
the service provider was receiving / purchasing the equipment such as basic telephone
unit, rechargeable batteries, power units, and handsets from other States, and providing
them to their customers; even though these receipts are called “refundable deposits”,
the service provider is under no obligation to return the deposit after receiving back the
equipment supplied on expiry of the stipulated period; in these transactions the title and
ownership is legally with the service provider; the book value of these equipment, after a
period of one year, is almost nil as it has no saleable value and depreciation is claimed
thereupon; the battery and other equipment supplied lose their life, and no replacement
is made by the company; in effect the equipment, provided to the customer, is on a
perennial basis; the amount received by the service provider forms part of their common
till, and is rotated/utilized for their business purpose; these deposits are, in reality, the
consideration received for use of the goods; these equipment, including consumables
such as batteries etc., are transferred on a permanent basis; and amount to a transfer of
the right to use the said equipment.

60. While the Learned Senior Counsel, and the Counsel for the petitioners, would
contend that “refundable deposits” are collected from post paid subscribers for
providing STD and ISD facility, it is the case of the Revenue that these “refundable
deposits” are collected for supply of telephone equipment, rechargeable batteries and
handsets to subscribers; and these "goods" are neither returned by the subscriber nor do
the service providers refund the security deposit to the subscribers concerned. The case
of the Revenue, in short, is that these refundable deposits are a form of disguised
consideration for the transfer of right to use "goods".

61. If, as contended on behalf of the service providers, these “refundable deposits”
are taken as security for payment due from subscribers who have availed STD and ISD
facilities, such deposits can neither be said to be a"sale" nor are there any "goods"
involved in such transactions. Consequently these refundable deposits cannot be brought
to tax on the premise that there is a transfer of the right 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, mobile handsets, modems and Caller ID instruments are
"goods" both under Article 366(12) of the Constitution of India and Section 2(16) of the
Act.

4. In case these goods are sold or supplied to the subscribers by the service providers
such"sale" or the “transfer of the right to use these goods” would be liable to tax
either under Section 4(1) or Section 4(8) of the Act.

5. 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.

6. 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.

7. 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.

8. 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, then
such deposits, not being "goods", cannot be brought to tax under the Act.

9. If, however, the refundable deposits are for supply of telephone instrument, hand set
etc., which are "goods" and it is established that the deposits are a disguised form of
sale consideration, then these refundable deposits may also form part of the sale
consideration under Section 2(29)(b) of the Act, and would be chargeable to tax under
Section 4 thereof.

63. The impugned revisional/appellate/assessment orders, under challenge in these writ

petitions, are set aside. As we have held that telephone instruments, modems, mobile
handsets and caller ID instruments are all "goods" and, if the service provider has either
sold or has transferred the right to use such goods to the subscriber, such "sale" or the
“transfer of the right to use” such goods is liable to tax under Section 4(1) and 4(8)
of the Act, the orders of the STAT, under challenge in these TRCs, are set aside. The
STAT/ revisional/appellate/assessing authorities concerned shall, in the light of the
observations made in this order, pass orders afresh after putting the petitioners on
notice and giving them an opportunity of being heard. All the TRCs and the Writ Petitions
are allowed. However, in the circumstances, without costs.

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