NATIONAL LAW INSTITUTE UNIVERSITY,

BHOPAL

In the partial fulfillment for the requirement of the project on the subject of Law of Contracts 2 of
B.A., L.L.B (Hons.), Third Trimester.

Submitted on __thApril 2018

BHARAT SANCHAR NIGAM LTD VS UNION OF INDIA – CASE

ANALYSIS

Submitted to:
Miss Neha Sharma[Faculty for Law of Contracts]

Submitted by :
Hrishikesh Jaiswal
(2018BALLB126)

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 TABLE OF CONTENTS

CERTIFICATE...............................................................................................3

PREFACE…………………………………………………………………..4

ACKNOWLEDGEMENT...............................................................................5

INTRODUCTION...........................................................................................6

RESEARCH METHODOLOGY…………………………………………...7

PAST HISTORY OF THE CASE …..……...................................................8

CONTENTIONS OF THE PETITIONERS…………………………………9

CONTENTIONS OF THE RESPONDENTS………………………………10

ISSUES FRAMED BY THE SC…………………………………...………..13

JUDGEMENT OF THE SUPREMECOURT…………..……………………14

CONCLUSION…………………………………………………….…………19

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 CERTIFICATE

This is to certify that the research project titled “ BHARAT SANCHAR NIGAM LTD VS UNION
OF INDIA CASE ANALYSIS” has been prepared by Hrishikesh Jaiswal, who is currently
pursuing B.AL.L.B (HONS) at National Law Institute University ,Bhopal in fulfillment of Law of
Contracts-II course
Date ___________________
Signature of student ___________________
Signature of faculty ____________________

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 PREFACE

I feel great pleasure in presenting the project under study. I hope that the readers will find the
project interesting and that the project in its present from shall be well received by all.
The project contains a detailed study of BSNL VS UOI CASE ANALYSIS.

Every effort is made to keep the project error free. I would gratefully
acknowledge any suggestions to improve the project to make it more useful.

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 AKNOWLEDGEMENT

On completion of this Project it is my present privilege to acknowledge my profound

gratitude and indebtedness towards many people for their valuable suggestions and
constructive criticism. Their precious guidance and unrelenting support kept me on
the right track throughout the project. I gratefully acknowledge my deepest sense of
gratitude to:
Prof. (Dr.) V Vijayakumar , Director, National Law Institute University, Bhopal for
providing us with the infrastructure and the means to make this project;

Our Law of Contracts 2 teacher Miss Neha Sharma, who provided me this wonderful
opportunity and guided me throughout the project work.

I would also like to thank my batch mates and seniors for their constant help and guidance
which helped me in completing this project.

I’m also thankful to the library and computer staffs of the University for helping us find and
select books from the University library.

Finally, I’m thankful to my family members and friends for the affection and
encouragement with which doing this project became a pleasure.

HRISHIKESH JAISWAL
(2018BALLB126)

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 INTRODUCTION

The world is ever changing and the pace is increasing with every passing day.With Globalization
Privatisation and Liberalization the courts are seen struggling with new and unique cases everyday
The court has to deal with the intricasies of each case separately ,with passing time it is observed
that the courts in India are seen been approached for matters of commerce more than ever,the
current case deals with goods ,services and taxation laws etc. Section 2(7) of the sale of goods act
deals with the definition of goods it says that“every kind of movable property other than
actionable claims and money; and includes 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 current matter involves service tax liability on the
commission received from BSNL for sale of mobile sim cards during the period from
April 2005 to 2008. The appellant was selling the sim cards in the hands of its subscribers
on a valuation consideration and paying service tax only on the activation charges.The
court decided that if the parties intended that the sim cards would be a separate object of
sale then it would be open to levy sales tax thereon However , if the sale of the sim cards
is merely incidental to the service being provided and only facilitates the identification of
the subscriber ,it would not be liable to the sales tax .The current case deals with 4 major
problems 1)What are "goods" in telecommunication 2)Is there any transfer of any right to use
any goods by providing access or telephone connection by the telephone service provider
to a subscriber3)Is the nature of the transaction involved in providing telephone
connection a composite contract of service and sale? If so, is it possible for the States to
tax the sale element4)Would the "aspect theory" be applicable to the transaction enabling
the States to levy sales tax on the same transaction in respect of which the Union
Government levies service tax.

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 RESEARCH METHODOLOGY

STATEMENT OF PROBLEM
Analyze the case of Bharat Sanchar Nigam ltd vs Union of India.And checking whether
telecommunications fall under goods or service

OBJECTIVE

 What are "goods" in telecommunication ?

 Is there any transfer of any right to use any goods by providing access or
telephone connection by the telephone service provider to a subscriber?
 Is the nature of the transaction involved in providing telephone connection a
composite contract of service and sale? If so, is it possible for the States to
tax the sale element?
 Would the "aspect theory" be applicable to the transaction enabling the
States to levy sales tax on the same transaction in respect of which the
Union Government levies service tax.

METHODOLOGY
The method used for research work in the present project is the doctrinal method of data
collection.

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 BHARAT SANCHAR NIGAM LTD. AND ANR. V. UNION OF INDIA
AND

ORS.

(2006) 3 SCC 1

PAST HISTORY OF THE CASE

The service providers who were the writ petitioners before the Kerala High Court in a
case 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 before
Supreme Court. Further, other Service Providers also approached the Apex Court by
way of writ petitions under Article 32 of the Constitution of India. When the Civil
Appeals and writ petitions were listed before two learned Judges, the matter was
referred to a Larger Bench as the “Nature of the questions raised in appeals/petitions
was important”.

THE DECISION IN THE ESCOTEL’S CASE

The issue of the nature of transactions by which mobile phone connections are enjoyed-it
is a sale or is it a service or both– had been coming up for

Pradesh1and Punjab and Haryana2 held that there was no sale of goods justifying the
levy of State sales tax on rentals charged by service provided to its subscribers. All
the three decisions were however overruled by the SC in the case of State of UP vs
Union of India

1
Union of India v. Secy, Revenue Department, (1999) 113 STC 203 (AP)
2 3
Union of India v. State of Haryana, (2001) 123 STC 539 (P&H)

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 However, the Kerala High Court took a different view in the case of Escotel Mobile
Communications Ltd. v. Union of India3and held that the transaction of sale of a sim
card included its activation and thus formed part of state sakes tax. It also held that
selling of SIM cards and the process of activation were services as well and fell within
the definition of Taxable service as defined in Section 65(72)(b) of the Finance Act,
1994.

Principle question before the SC

The main question which was to be determined in the case was whether the nature
of transactions by which mobile phone connections are enjoyed fall within the
ambit of sale, service or both?

If it is a sale, states are legislatively competent to levy sales tax on the transaction
under 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 entry
92c of List I after 2003). And if the nature of the transaction falls in categories of both
sale and service, the moot question would be whether both legislative authorities
could levy their separate taxes at the same time or only one of them can do so.

CONTENTIONS OF THE PETITIONER

 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 is
imposed on them under the Finance Act, 1994 on the basis of the tariff realised
from the subscribers. They further contended that in providing such service
there is in fact no 'sales' effected by the service providers.
 Clause (d) of Article 366(29A) relied upon by the respondents contemplates a
transfer of a legal right to use goods. According to the petitioners there is no
transfer of any legal right by the service providers nor any delivery of any
goods which may be covered under the Telegraph Act, 1885 as the same is
barred and prohibited in terms of the licence granted to service providers
3
(2002) 126 STC 475 (Ker)
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 under 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 Article
366(29A)(d).
 It was further emphasised that there must be goods of which the right to
transfer is covered by sub-clause (d) of clause (29A) of article 366. It is
submitted that what the service providers provide was a means of
communication 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 device for
granting access and was a means to access services. Hence, the SIM card was not
goods it merely enables activation

 It is pointed out that the sale was factually and legally distinct from the activity of
giving the connection or activation of the SIM cards.
 It was submitted that taxing telecommunication services as a deemed sale
under Entry 54 of List II would be violative of Article 286 of the Constitution
as the same involves connecting subscribers throughout the territories of India
without 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 should
apply the standard of the ordinary man for deciding whether the transaction in
question was a contract for service or for transfer of a right to use deemed
goods. The obligation of the service provider is merely to transmit voice and
the subscriber was not interested in stipulating as to how the voice/data is to be
conveyed to the other end.
 The Union of India has supported the service providers and contended that the
transaction in question was only "service".

RESPONDENTS CONTENTION

 The respondents, i.e., the States, raised a preliminary objection contending that
the plea of the petitioners is barred by res judicata because the issue has been

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 decided 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 to
use any goods for any purpose read with the charging sections in their various
sales tax enactments and, therefore, they are competent to levy sales tax on the
transactions.
 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 is
submitted, 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 been
described as a service in any legislative enactment or contract or licence.

 It was submitted that the test of dominant object of a composite works

contracts was no longer relevant after 46th constitutional amendment. It was
submitted that the service providers transfer the right to use radio frequency
channel to a subscriber for a specific duration and thus have effected a deemed
sale of goods under Article 366(29A)(d).
 Therefore, the State's powers must be read harmoniously with the Union's
power and it is only when such reconciliation is impossible that the primacy
should be given to the non obstante clause under Article 248(1).
 The respondents further submitted that delivery of goods was not necessary for
the purpose of transferring the right to use and this had been held in the decision

of Apex Court in 20th Century Finance Corpn. Ltd. v. State of Maharashtra.4

 A subscriber makes use of the telephone system as a matter of right and is

capable of asserting that right even against the Government. The subscriber's
right to use his telephone line is to the exclusion of every other person and to
that extent the right of the Government/service providers stands denuded. The
right is based on contract and is in addition to the right to the service provided
by the service providers. The SIM Card operates as key for access to the
telephone system or network and symbolizes the right of participation by a
subscriber in the telephone system.
 It is also submitted that in any event different aspects of a given transaction can

4 6
(2000) 119 STC 182 (SC).

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 fall within the legislative competence of two legislations, then both would have
the power to tax that specific aspect, i.e. the theory of aspect would apply so that
what was service in one aspect was a sale in the other. It was also submitted that
because in sub- clauses (b) and (f) of Clause (29A) of Article 366 the tax on a
component in a transaction of works is permissible, it cannot be assumed that in
Sub-clause (d) tax could not be imposed on an element of the sale component of
that transaction.
 These are two distinct transactions, one as the transferee of the legal right to
use the telephone and the other of a contract of service. These are two different
aspects, each attracting a different tax. Service is only one of the purposes for
which the transfer or deemed sale is made by the Government.

 It was submitted that the question whether the goods were moveable or
immoveable property as well as the question whether the tax was being levied
on inter state sales or not were all matters of assessment and that the judgment
in State of U.P. v. Union of India should be affirmed

 Countering the submission that the sales would be inter state sales, it is
submitted that the situs of the taxable event under the Sales Tax Act would be
where the transfer of the right takes place between the service providers and
the subscribers. This was also a question which would vary from case to case
and would have to be ultimately factually decided by an assessment authority.
 The use of the words “any goods” in Article 366(29A)(d) showed that the goods
need not necessarily be transferred by the transferor. It is further emphasised that
sub-clause (d) also uses the words “for any purpose”. This could include the
purpose of service.

ON THE PRELIMINARY OBJECTION RAISED BY THE RESPONDENTS

ON MAINTAINABILITY OF THE PETITION
The state government argued that since the issue raised in the present case has already

been decided by the Supreme Court in the case of State of U.P. v. Union of India5, the
present petition is barred by res judicata
However, the court overruled this contention on the following grounds

5
MANU/SC/0073/2003

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  The Apex Court rejected the contention of the respondents by stating that the
principle of res judicata does not apply in matters pertaining to tax for different
assessment years because res judicata applies to debar Courts from entertaining
issues on the same cause of action whereas the cause of action for each
assessment year is distinct. (Amalgamated Coalfields Ltd. v. Janapada Sabha6)
Where facts and law in a subsequent assessment year are the same, no authority
whether quasi judicial or judicial can generally be permitted to take a different
view. This mandate is subject only to the usual gateways of distinguishing the
earlier decision or where the earlier decision is per incuriam.( Rupa Ashok Hurra
v. Ashok Hurra7)

However, this mandate applies to a coordinate bench in the same lis. It does not apply
when there is a separate lis in which the contention is to overrule the previous decision
and to test its precedential value, that too by a superior court or a larger bench, the
principles of Res judicata do not apply. Overruling of a decision takes place in a
subsequent lis where the precedential value of the decision is called in question. No one
can dispute that in our judicial system it is open to a Court of superior jurisdiction or
strength before which a decision of a Bench of lower strength is cited as an authority,
to overrule it. This overruling would not operate to upset the binding nature of the
decision on the parties to an earlier lis in that lis, for whom the principle of res judicata
would continue to operate.
 Res judicata under Section 11 of the Code of Civil Procedure, 1908 must not be
made strictly applicable to writ petitions under Articles 32 and 226 of the
Constitution of India

ISSUES IDENTIFIED AND FRAMED BY THE SUPREME COURT

A) What are "goods" in telecommunication for the purposes of Article 366(29A)

(d)?
B) Is there any transfer of any right to use any goods by providing access or

6 9
(1963) Supp.1 SCR 172. It was held that although tax in a subsequent year gives rise to a fresh cause of
action, the issue can be said to have been decided in a collateral and incidental way
7
MANU/SC/0910/2002

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telephone connection by the telephone service provider to a subscriber?
C) Is the nature of the transaction involved in providing telephone connection a
composite contract of service and sale? If so, is it possible for the States to tax the
sale element?
D) If the providing of a telephone connection involves sale is such sale
an inter state one?
E) Would the "aspect theory" be applicable to the transaction enabling the
States to levy sales tax on the same transaction in respect of which the Union
Government levies service tax.

JUDGMENT OF THE SUPREME COURT

The Supreme Court examined the issues in detail and referred to a number of its own
past judgments and decisions of High Courts which have a bearing on this case and
decided as follows:
A) What are “goods” in telecommunication for the purposes of Article 366(29A)
(d) ?
 Article 366(12) has defined the word "goods" for the purpose of the
Constitution as including “all materials, commodities, and articles.” The
word "goods" has also been defined in Section 2(7) of the Sales of Goods Act,
1930 as meaning “every kind of movable property other than actionable
claims and money; and includes 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.”

A.1 Definition of “Goods” Not Altered

The Apex Court further observed that by introducing separate categories of

“deemed sales”, as a result of introduction of Article 366(29A), the meaning of
the word “goods” was not altered and secondly the Gannon Dunkerley8 case
had survived with reference to the dominant nature test to be applied to a
composite transaction not covered by article 366(29A).
8
In this case, the Supreme Court had held that the expression ‘sale of goods’ as used in the entries in
the Seventh Schedule to the Constitution of India has the same meaning as given in the sale of goods
act,1930. It was further held that for a transaction to be taxed, it must fulfill the following conditions:
1) parties competent to contract, 2) mutual assent, and 3) transfer of property in goods from one party
to the contract to the other thereto for a price

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 A.1.1 Electromagnetic waves not goods
The apex court held that 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 9they are
merely the medium of communication . What is transmitted is not an
electromagnetic wave but the signal through such means.The signalthrough
such means.The signals are generated by the subscibers themselves .In
telecommunication what is transmitted is the message by tebmeans of
telegraph .No part of the telegraph itself is transferrable or deliverable. In view
of the foregoing, the Apex Court held that the electromagnetic waves are not
'goods' within the meaning of the word either in Art. 366(12) or in the State
Legislations.

A.1.2 More basic reason: Intention

The second reason is more basic. A subscriber to a telephone service could not
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. At the most the concept of the
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. As far as the
subscriber is concerned, no right to the use of any other goods, incorporeal or
corporeal, is given to him or her with the telephone connection.

B) Is there any transfer of any right to use any goods by providing access or
telephone connection by the telephone service provider to a subscriber?

The Apex Court opined that the essence of the right under Article 366 (29A) (d) is
that it relates to use 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 any agreement to transfer the right to use, that the

9 12
Relying on the Test laid out in the case of TCS v. State of A.P., (2005) 1 SCC 308
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 goods are available and deliverable. If the goods, or what is claimed to be goods by
the respondents, are not deliverable at all by the service providers to the subscribers,
the question of the right to use those goods, would not arise. But if there are no
deliverable goods in existence as in this case, there is no transfer of user at all.
Providing access or telephone connection does not put the subscriber in the possession
of the electromagnetic waves any more than a toll collector puts a road or bridge into
the possession of the toll payer by lifting a toll gate.The Apex Court pointed out that
the toll payer will use the road or bridge in one sense. But the distinction with a sale
of goods is that 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. Therefore
whether goods are incorporeal or corporeal, tangible or intangible, they must be
deliverable and capable of being abstracted.To the extent that the decision in Stateof
Up vs UOI held otherwise was held tob be erroneous as this transaction did not satisfy
the test of TCS vs State of AP10 .

C) Is the nature of the transaction involved in providing telephone connection a

composite contract of service and sale? If so, is it possible for the States to tax the
sale element?

C.1. Composite Contracts under Section 366(29A)(d)

The interpretation in the case of State of Madras v. Gannon Dunkerley & Co.
11
was followed in determining whether a transaction was a sale and was liable to

be taxed, till the 46th amendment made in 1981 on the recommendation of the
Law Commission. Prior to this amendment, composite contracts were not liable
to be taxed. Hence, meals were served at a hotel to residents were not liable to
sales tax as it was difficult to distinguish the value of goods from that of the it
comprised of a contract to provide for labour and a contract to provide for
material. Of these, the latter taken independently was a sale, but if it only formed
a component of the whole transaction then it was not a sale. Sale was to
comprise of three elements: (i) an agreement to transfer title (ii) supported by
consideration, and (iii) an actual transfer of title in the goods.

10
(2005) 1 SCC 308
11
MANU/SC/0152/1958 It was held that the contract for the construction of a building was not sale as
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 service provided.12 Hence Section 366 (29A) was enacted to remedy the evasion
of taxes being facilitated by this narrow definition of ‘sale of goods’ and hence
those contracts in which a certain element of sale was missing were made liable
to tax. Hence the title to the goods under Clause (d) remains with the transferor
who only transfers the right to use the goods to the purchaser.

However this amendment only specifically brings certain classes of composite

contracts within the ambit of tax liability, all other composite contracts are yet
again not liable to tax because of the basic principle of Gannon
Dunkerleys13Case which survived the amendment namely unless the transaction
in truth represents two distinct and separate contracts and is discernible as
such, then the State 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 therefore 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 was no such intention, there is no
sale even if the contract could be disintegrated. The substance of the contract
has to be looked into, this is the “dominant nature” test. What are the "goods"
in a sales transaction, therefore, remains primarily a matter of contract and
intention. The seller and such purchaser would have to be ad idem as to the
subject matter of sale or purchase. To determine this question, the Court would
have to approach the matter from the point of view of a reasonable person of
average intelligence.

C.2. Is it possible for the States to tax the sale element?

The Apex Court pointed out that no one can deny the legislative competence of
States to levy sales tax on sales provided that the necessary concomitants of a
sale are present in the transaction and the sale is distinctly discernible in the
transaction. This does not however allow State to entrench upon the Union list
and tax services by including the cost of such service in the value of the goods.
Even in those composite contracts which are by legal fiction deemed to be
divisible under Art. 366(29A), the value of the goods involved in the execution
12
State of Punjab v. Associated Hotels of India Ltd. MANU/SC/0570/1972
13
Supra n.4

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 of the whole transaction cannot be assessed to Sales Tax.

Thus the Apex Court held that the nature of the transaction involved in
providing the telephone connection may be a composite contract of service and
sale. It is possible for the State to tax the sale element provided there is a
discernible sale and only to the extent relatable to such sale.

D) If the providing of a telephone connection involves sale is such sale an inter

state one?
The issue of whether sale, if involved in providing of a telephone connection, is an
inter-state one or not was left unanswered by the Apex Court.

E) Would the "aspect theory" be applicable to the transaction enabling the

States to levy sales tax on the same transaction in respect of which the Union
Government levies service tax.
The aspect theory was succinctly explained in the case of Federation of Hotel &
Restaurant Association of India v. Union of India14 as follows:
“subjects which in one aspect and for one purpose fall within the power of a particular
legislature may in another aspect and for another purpose fall within another
legislative power. They might be overlapping; but the overlapping must be in law. The
same transaction may involve two or more taxable events in its different aspects. But
the fact that there is overlapping does not detract from the distinctiveness of the
aspects”.

This however, does not mean that the state can tax the service along with the goods in
a transaction and infringe on the domain of the Centre. For the same reason the Centre
cannot include the value of the SIM cards, if they are found ultimately to be goods, in
the cost of the service.15
which states that there is mutual exclusivity in VAT and Service Tax. Latest
judgment on this aspect being Imagic Creative Private Limited vs. Commissioner
of Commercial Taxes, 2008-TIOL-04-SC- VAT, dated 9 January 2008.

14
(1989) 3 SCC 634
15
Following the mandate of Gujarat Ambuja Cements Ltd. v. Union of India MANU/SC/0225/2005
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 CONCLUSION

In the present case it can be concluded that The apex court held that
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 marketable16they are merely the medium of
communication . What is transmitted is not an electromagnetic wave but the
signal through such means. The signal through such means. The signals are
generated by the subscribers themselves .In telecommunication what is
transmitted is the message by the means of telegraph .No part of the telegraph
itself is transferrable or deliverable also the nature of the transaction involved in
providing the telephone connection may be a composite contract of service and
sale. Providing access or telephone connection does not put the subscriber in the
possession of the electromagnetic waves any more than a toll collector puts a
road or bridge into the possession of the toll payer by lifting a toll gate It is
possible for the State to tax the sale element provided there is a discernible sale
and only to the extent relatable to such sale. subjects which in one aspect and for
one purpose fall within the power of a particular legislature may in another
aspect and for another purpose fall within another legislative power. They might
be overlapping; but the overlapping must be in law. The same transaction may
involve two or more taxable events in its different aspects. But the fact that there
is overlapping does not detract from the distinctiveness of the aspects.

16 12
Relying on the Test laid out in the case of TCS v. State of A.P., (2005) 1 SCC 308
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