VERY IMPORTANT POINT
Rentals collected by Union of India s Department of Telecommunications from the subscribers in U.P. State can be assessed to tax under U.P. Trade Tax Act, 1948.

Headnote:Constitution of India-Article 366 Clause 29-A(d)-Tax on sale or purchase of goods to include a tax on the transfer of the right to use any goods for any purpose-Uttar Pradesh Trade Tax Act, 1948-Section 3F-Tax on the right to use any goods-Can rentals collected by the Department of Telecommunications of the Union of India from the subscribers of telephones in U.P. State, be assessed to tax under U.P. Trade Tax Act? High Court holding that DoT is not a dealer within the meaning of Section 2(c) of U.P. Act and that Section 3-F of U.P. Act does not apply to rental charges collected by DoT-Appeals to Supreme Court-Whether High Court is correct? (No)-Appeals allowed-Case remanded for fresh demand in accordance with law.
       Held : Unfortunately, the High Court failed to notice Section 3-F in its entirety and erred in confining it only to goods involved in the execution of work s contract . (Para 8)
       Inasmuch as under Section 3 read with Section 3F of the U.P. Act the liability to pay tax, inter alia, on the transfer of the right to use any goods at the specified rate is on a dealer, as defined in Section 2(c) thereof, extracted above, we shall examine the scope of the definition to ascertain - is the DoT a dealer? (Para 10)
       Held : Inasmuch as the definition of sale includes any transfer of property in the goods and a transfer of the right to use any goods for any purpose, the DoT which engages in transfer of right to use any goods will be a dealer within the meaning of sub-clause (iv) of clause (c) of Section 2 of the U.P. Act. (Para 11)
       Held further : We are, therefore, unable to uphold the reasoning of the High Court that in view of amendment of Section 2(c) in 1995, adding sub-clause (viii), sub-clause (vi) had to be interpreted differently so as to exclude the DoT from the meaning of dealer and also the contention of the learned Additional Solicitor General. In our view, insertion of sub-clauses (vii) and (viii) in clause (c) of Section 2 was, as submitted by Mr. Gupta, by way of abundant caution. (Para 15)
       We, therefore, have no hesitation in holding that telephone connection and all other accessories which give access to the telephone exchange with or without instruments are goods within the meaning of Section 2(d) of the U.P. Act. (Para 19)
       Held also : For the aforementioned reasons, we hold that providing telephone service by the DoT which comprises of allotment of number, installation of an instrument/apparatus and other appliances at the premises of a subscriber, which are connected with a telephone line to the area exchange to enable him to have access to the whole system, to dial and to receive calls, in effect, falls within the meaning of the extended definition of sale . viz., within the meaning of the transfer of the right to use any goods and the fact that it is described as service under the ITA 1885 and the Rules made thereunder or under the Finance Act, 1994 would not militate against the same being a sale within the meaning of the U.P. Act. (Para 28)
       Held in addition : Having given our anxious consideration to the submissions made in regard to the composite contract of service of goods and the classification, above referred, we are of the view that they will not apply to the present case. Here the service of telephone connection cannot be artificially split into various categories - supply of instruments and accompaniment on the one hand and supply of telegraphic line/connection on the other, to name the former as sale and the latter as service . The analogy of composite contract will apply where sale and service are two different independent objects. (Para 38)
       Held consequently : Inasmuch as we have found that the DoT is a dealer as defined in Section 2(c) of the U.P. Act and it collects rentals for the supply of transfer of use of telephone connection, which is compendiously called service and that the supply of telephone satisfies the requirements of a transfer of the right to use the goods within the meaning of sale in Section 2(h); it also receives consideration, therefore, the requirements of charging Section 3 read with Section 3(f) are satisfied. The judgments and orders under challenge in these appeals are, therefore, set aside. (Para 39)
       But held : We must, however, consider the last submission that the impugned demands relate to not only rentals but also to various other charges and, therefore, for working out the correct demand, the cases have to go back to the assessing officer for raising fresh demand. We find considerable force in that submission. We set aside the demand in question and direct the DoT (the respondent) to file the Returns within three months from today. The Assessing Authority shall make order of assessment and raise fresh demand in accordance with law. (Para 41)
       Held finally : The appeals are accordingly allowed with costs. (Para 42)

JUDGMENT

Syed Shah Mohammed Quadri, J.-The State of Uttar Pradesh and the Sales Tax Officer (referred to in this judgment as, the State ) are in appeal against the common judgment of a Division Bench of the High Court of Judicature at Allahabad in Writ Petition No. 115 of 1995 Union of India & Anr. vs. State of U.P. & Anr. and batch dated September 1, 1998*.

2. The State, being of the opinion that the second respondent (The Manager, Department of Telecommunications, of the first respondent - hereinafter collectively referred to as the DoT ) failed to file return of the turnover of the rentals collected from the subscribers for the transfer of right to use the telephone system during the year 1988, under the provisions of the Uttar Pradesh Trade Tax Act, 1948 (for short, the U.P. Act ), called upon the DoT to file return therefor. However, no return was filed by the DoT. The State assessed the tax payable by the DoT in exercise of the power conferred under sub-section (3) of Section 7 of the U.P. Act. The DoT challenged the validity of the orders of assessment in the writ petitions before the High Court on various grounds. The State pleaded justification for passing the order of assessment in view of the extended definition of the expression Tax on the sale or purchase of goods in clause 29-A** of Article 366 of the Constitution of India and the relevant provisions of the U.P. Act. The High Court, by the impugned judgment and order, allowed the writ petitions taking the view that (i) the DoT (Union of India) is not a dealer within the meaning of the Act; (ii) Section 3-F of the Act applies to work contracts only and not to the rental charges collected by the DoT; (iii) there is no legislative competence in the State to levy Trade Tax in view of the fact that the Parliament authorised imposition of service tax under the Finance Act, 1994 on the use of the telephone service by the subscribers; (iv) Article 285(1) of the Constitution of India prohibits the State from imposing any tax on the property of the Union of India; and (v) in providing telephone service through the DoT, Union of India is discharging its sovereign function which cannot be subjected to trade tax.

3. Mr. Sunil Gupta, the learned senior counsel appearing for the appellants-State, assailed the validity of the reasoning and conclusions of the High Court on all the points, referred to above.

4. Mr. Mukul Rohtagi, the learned Additional Solicitor General, appearing for the respondents-DoT, conceded, in our view rightly, that he would not be supporting the judgment of the High Court on the grounds (iv) and (v) mentioned above. But he contended, rather vehemently, that the DoT would not fall within the definition of dealer under the U.P. Act and that the activity of providing telephone service would not answer the definition of the transfer of right to use the goods and, therefore, the High Court rightly quashed the impugned orders of assessment.

5. Mr. Joseph Vellapally, the learned senior counsel appearing for the intervenor, contended that the contract of the subscribers with the DoT for installation of telephone was an indivisible contract for providing service which cannot be split into two separate contracts - one for transfer of the right to use any goods and the other for the service provided. He elaborated the contention by pointing out that under the Indian Telegraph Act, 1885 and the Rules made thereunder, no agreement can be spelt out to transfer the right to use any goods by the DoT to the subscriber. In any event, submitted the learned senior counsel, supply of goods, if any, was incidental to the performance of contract of service. Relying on the decision of this Court in The State of Punjab vs. M/s. Associated Hotels of India Ltd. [1972 (1) SCC 472], he argued that such composite contracts are indivisible as the parties never contracted to sell/supply any goods; such incidental sale/supply, being merely concomitant of the performance of the se

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2003 Supreme(SC) 128

VERY IMPORTANT POINT Rentals collected by Union of India s Department of Telecommunications from the subscribers in U.P. State can be assessed to tax under U.P. Trade Tax Act, 1948.

Cases Referred (15)

VERY IMPORTANT POINT
Rentals collected by Union of India s Department of Telecommunications from the subscribers in U.P. State can be assessed to tax under U.P. Trade Tax Act, 1948.