Important pointElectromagnetic waves are not ‘goods’ within the meaning of the word either in Article 336(12) of the Constitution or in the State Legislations. The transaction by which mobile phone connections are enjoyed is purely one of services.

Headnote:Constitution of India—Article 366 (29A)(d), Entry 97, List I; Entry 54, List II, Seventh Schedule—U.P. Trade Tax Act, 1948—Sections 2(h) and 3F—Telecom Regulatory Authority of India Act, 1997—Indian Telegraph Act, 1885—Section 4—Competence of States to levy sales tax on telecommunication service—Nature of the transaction by which mobile phone connections are enjoyed—Is it a sale or is it a service or is it both—Petitioners, service providers contending that there is no sale transaction involved—Allegations that attempt of several States to levy tax on the provision of mobile phone facilities by them to subscribers was constitutionally incompetent—Petitioners case that the transaction in question was merely a service and that Union Government alone was competent to levy tax thereon—What are ‘goods’ in telecommunication for the purposes of Article 366(29A)(d)—Is there any transfer of any right to use any goods by providing access or telephone connection by the telephone service providers to a subscriber—(No)—Is the nature of the transaction a composite contract of service and sale—If the providing of a telephone connection involves sale is such sale an inter state one—Would the ‘aspect theory’ be applicable to the transaction.
       As per Ruma Pal and Dalveer Bhandari, JJ.
       Held : After the 46th Amendment, the sale element of those contracts which are covered by the six sub-clauses of clause (29A) of Article 366 are separable and may be subjected to sales tax by the States under Entry 54 of List II and there is no question of the dominant nature test applying. (Para 47)
       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. 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. 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." (Paras 48 & 49)
       It is clear, 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 the 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 subscribers. 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. (Paras 59 & 60)
       For the reasons stated by us earlier we hold that the electromagnetic waves are not ‘goods’ within the meaning of the word either in Art. 366(12) or in the State Legislations. It is not in the circumstances necessary for us to determine whether the telephone system including the telephone exchange was not goods but immovable property as contended by some of the petitioners. (Para 67)
       Providing access or telephone connection does not put the subscriber in 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. Ofcourse 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. (Para 73)
       For the reasons aforesaid, we answer the questions formulated by us earlier in the following manner:
       A) Goods do not include electromagnetic waves or radio frequencies for the purpose of Article 366 (29A)(d). The goods in telecommunication are limited to the handsets supplied by the service provider. As far as the SIM cards are concerned, the issue is left for determination by the Assessing Authorities.
       B) There may be a transfer of right to use goods as defined in answer to the previous question by giving a telephone connection.
       C) 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) The issue is left unanswered.
       E) The aspect theory would not apply to enable the value of the services to be included in the sale of goods or the price of goods in the value of the service. (Para 86)
       As per Dr. A.R. Lakshmanan, J.
       To constitute a transaction for the transfer of the right to use the goods the transaction must have the following attributes:
       a. There must be goods available for delivery;
       b. There must be a consensus ad idem as to the identity of the goods;
       c. The transferee should have a legal right to use the goods - consequently all legal consequences of such use including any permissions or licenses required therefor should be available to the transferee;
       d. For the period during which the transferee has such legal right, it has to be the exclusion to the transferor - this is the necessary concomitant of the plain language of the statute - viz. a "transfer of the right to use" and not merely a licence to use the goods;
       e. Having transferred the right to use the goods during the period for which it is to be transferred, the owner cannot again transfer the same rights to others. (Para 92)
       The contract between the telecom service provider and the subscriber is merely to receive, transmit and deliver messages of the subscriber through a complex system of fibre optics, satellite and cables. Briefly, 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 Petitioners. The radio waves are transmitted to the switching apparatus in the local exchange and thereafter 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). The BTS transmits the signal to the receiver apparatus of the called subscriber, which converts the signals into voice, which the subscriber can hear. (Paras 105 & 106)
       It is not possible to interpret the contract between the service provider and the subscriber that the consensus was to mutilate the integrity of contract as a transfer of right to use goods and rendering service. Such a mutilation is not possible except in the case of deemed sale falling under sub clause (b). Nor can the service element be disregarded and the entirety of the transaction be treated as a sale of goods (even when it is assumed that there is any goods at all involved) except when it falls under sub clause (f). This will also result in an anomaly of the entire payment by the subscriber to the service provider being for alleged transfer of a right to use goods and no payment at all for service. The licence granted by the Central Government fixes the tariff rates and all are for services. (Para 113)
       It is, therefore, unnecessary to deal with the question of delivery of possession which is related only to situs and not to subject-matter of taxation which is a transfer of right to use goods. In the present case, as no goods element are involved, the transaction is purely one of service. There is no transfer of right to use the goods at all. (Para 115)

Judgment

Ruma Pal, J.—The principal question to be decided in these matters is the nature of the transaction by which mobile phone connections are enjoyed. Is it a sale or is it a service or is it both? If it is a sale then the 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 then 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 partakes of the character of both sale and service, then the moot question would be whether both legislative authorities could levy their separate taxes together or only one of them.

2. The contenders are the service providers on the one hand and the States on the other. It is the case of the service providers (who are for the purposes of convenience referred to in this judgment as "petitioners" irrespective of the capacity in which they are arraigned in the several matters before us) that there is no sale transaction involved and that the attempt of the several States to levy tax on the provision of mobile phone facilities by them to subscribers was constitutionally incompetent. It is their case that the transaction in question was merely a service and that the Union Government alone was competent to levy tax thereon.

3. They are supported in their stand by the Union Government.

4. The States’ (who are correspondingly referred to as "the respondents") contention is that the transaction was a deemed sale under Article 366 (29A)(d) of the Constitution read with the charging sections in their various sales tax enactments and therefore they are competent to levy sales tax on the transactions. These are the contentions which are only briefly indicated at this stage to introduce the circumstances under which the issue has been raised before us.

5. The High Courts of Allahabad1, Andhra Pradesh2, and Punjab & Haryana3 all held that there was no sale of goods under the State Sales Tax Acts justifying the levy of sales tax on rentals charged by service providers to its subscribers. All three decisions were overruled by this Court in State of U.P. vs. Union of India (2003) 3 SCC 239. In the meanwhile the High Court of Kerala took a different view from the view expressed by the High Courts of Allahabad, Andhra Pradesh and Punjab & Haryana in Escotel Mobile Communications vs. Union of India (2002) 126 STC 475 (Ker.) The Division Bench of the Kerala High Court considered a situation where the State Sales Tax Authorities sought to include the value of activation charges in the sale price of the SIM (Subscribers Identification Module) Card on the sale of which sales tax was admittedly payable and had been paid. At the same time the Central Government sought to include the cost of the SIM Card in the service tax which was also admittedly payable and had been paid by the service provider for the service of activation of the SIM Card. The High Court held that the transaction of sale of a SIM Card included its activation and that therefore the activation charges formed part of the consideration and could be subjected to sales tax under the Kerala General Sales Tax Act. At the same time the selling of the SIM Card and the process of activation were both services provided by the Mobile Cellular Telephone Companies to the subscribers and fell within the definition of taxable services as defined in sections 65(72)(b) of the Finance Act, 1994. In other words the Kerala High Court answered all three questions framed by us in the opening paragraph of this judgment, in the affirmative and in favour of the Revenue.

6. The service providers who were the writ petitioners before the Kerala High Court have questioned the correctness of the decision in appeals filed by them which are also disposed of by this judgment. Most of the other petitioners have however approached this Court by way of writ petitions under Article 32. When the

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2006 Supreme(SC) 197

Important pointElectromagnetic waves are not ‘goods’ within the meaning of the word either in Article 336(12) of the Constitution or in the State Legislations. The transaction by which mobile phone connections are enjoyed is purely one of services.

Cases Referred (36)