BHARAT SANCHAR NIGAM LTD. AND ANR. v. UNION OF INDIA AND ORS.

(a) a tax on the sale or purchase of goods declared by Parliament by law to be of special importance in inter-State trade or commerce; (b) a tax on the sale or purchase of goods, being a tax of the nature referred to in sub-clause (b), sub-clause (c) or sub_-clause (d) of clause (29A) of article 366, be subjected to such restrictions and conditions in regard to the system oflevy, rates and other incidents of the tax as Parliament may by law specify." ·-I Therefore the deemed sales included in Entry 54 List II would also be subject to the limitations of Art. 286, Art. 366(29-A).

Being aware of the dangers of allowing the residuary powers Parliament under Entry 97 of List I to swamp the legislative entries in the State list, we have interpreted Entry 54, List II together with Article 366 (29A) without ~-- whittling down the interpretation by referring to the residuary provision. Having completed the exercise, we now tum our attention to the latter.

In 1994, service tax was introduced by Parliament under Chapter V of H

[2006] 2 S.C.R. ' - 862 SUPREME COURT REPORTS

A the Finance Act, 1994 \Vith reference to its residuary power under Entry 97 List I of the Seventh Schedule to the Constitution. Under the 1994 Act, ~ . 'taxable services' which were subject to levy of service tax were defined. Several different services were included in the definition. Section 65(16)(b) included service provided to a subscriber by the telegraph authority in relation to a telephone connection. wit~ effect from the com!,pg into force of the 1994 B ~

as a taxable service. Under Section 66, tax was imposed at the rate of five percent of the value of the taxable services provided to any person by the person responsible for collecting the service tax. The value of the taxable service in relation to a telephone connection provided to the subscribers, was ~:

to be the gross total amount received by the telegraph authority from the c subscribers. The 1994 Act was amended from time to time by extending the meaning of taxable service. We are concerned with two amendments, one made in 2002 and the other in 2003. By Section I49(90)(b) of the Finance Act, 2002, service to a subscriber by a telephone authority was continued as a taxable service. "Telegraph" was defined in Section 149(92) as having the same meaning assigned to it in clause (I) of Section 3 of the Indian Telegraph D Act, 1885. "Telegraph authority" was defined incorporating the definition of the phrase Section 3(6) of the 1885 Act and included "a person who has been granted a licence under the first proviso in Section 4( 1) of that Act. The liability of service providers to service tax was continued under Section 159(105)(110) (b) and (111) of the Finance Act, 2003. The definition of subscriber was added in sub section (I 04) as meaning "a person to whom any service of a telephone connection or a facsimile (Fax) or a leased circuit or a pager or a telegraph or telex has been provided by a telegraph authority". Finally in 2003, List I of the Seventh Schedule to the Constitution was amended by including taxes on service under Entry 92C. By this time there were about 100 taxable services including the service of a telephone connection. The question is - is the sale element is each of these several services and in particular the service of a telephone connection taxable by the States? .- As we have said Art. 366(29A) has no doubt served to extend the meaning of the word 'sale' to the extent stated but no further. We cannot presume that the Constitutional Amendment was loosely drawn and must proceed on the basis that the parameters of 'sale' were carefully defined. But having said that, it is sufficient for the purposes of this judgment to find, as we do, that a telephone service is nothing but a service. There is no sales

H element apart from the obvious one relating to the hand set if any. That and any other accessory supplied by the service provider in our opinion remair -

BHARAT SANCHARNIGAM LTDv. U.0.1. [RUMA PAL, J.] 863 . Jt to be taxed under the State....Sales Tax Laws. We have given the reasons A earlier why we have reached this conclusion.

This brings us to the decision of the Kerala High Court in Escotel.

In that case Escotel was admittedly engaged in selling cellular telephone instruments, SIM cards and other accessories and was also paying Central B Sales Tax and Sales Tax under the Kerala General Sales Tax Act, 1963 as applicable. The question was one of the valuation of these goods. State Sales Tax Authorities had sought to include the activation charges in the cost of the SIM card. It is contended by Escotel that the activation was part of the service onwhich service tax was being paid and could not be included within the purview of,.the sale .. T~e l<.~rala High Court also dealt with the case of C . BPL, a service provider. According to BPL, it did not sell cellular telephones . . As far as SIM cards were concerned, it was submitted that they had no sale . value. A SIM card merely represented a means of the access and identified the subscribers. This was part of the service of a telephone connection. The Court rejected this submission finding that .the SIM card was "goods" within D \ the definition of the word in the State Sales Tax Act.

' It is not possible for this Court to opine finally on the issue. What a SIM card represents is ultimately a question of fact as has been correctly submitted by the Statt:s. In determining the issue, however the Assessing Authorities will_ have to -keep in. mind the following principles: If the SIM E Card is not sold by the assessee to the subscribers but is merely part of the services rendered by the service providers, then a SIM card cannot be charged separately to sales tax. It would depend ultimately upon the intention of the parties. If the parties intended that the SIM card would be a separate object ... of sale, it would be open to the Sales Tax Authorities to levy sales. tax thereon. There is insufficient material on the basis of which we can reach ·a F d~cision. However we emphasise that if the sale of a SIM card is merely incidental to the service being provided and only facilitates the identification of the subscribers, their credit and other details, it would not be assessable to sales tax. In our opinion the High Court ought not to have finally determined the issue. In any event, the High Court erred in including the cost of the G service in the value of the SIM ca~~- by re lying on the aspects doctrine. That 0

doctrine merely deals with legislative competence. As has been succinctly . stated in Federation of Hotel & Restaurant Association of India v. Union of India, [ 1989] 3 SCC 634- "subjects which in one aspect and for one purpose fall within the power of a particular legislature may in another aspect and for H

864 SUPREME COURT REPORTS [2006] 2 S.C.R.

A 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". No one denies 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 of the whole transaction cannot be ass.essed to Sales Tax. As was said in Larsen & Toubro v. Union of India (supra):-

"The cost of establishment of the contractor which is relatable to supply of labour and services cannot be included in the value of the goods involved in the execution of a contract and the cost of establishment which is relatable to supply of materials involved in 'the execution of the works contract only can be included in the value of the goods".

For the sanie reason the Centre cannot include the value of the SIM E cards, if they are found ultimately to be goods, in the cost of the service. As • was held by us in Gujarat Ambu1a· Cements Ltd. v. Union of India (2005) 4 sec 2I4,22s: '.'This m\ltual exclusivity which has been reflected in Article 246(1) means that taxing entries must be construed so as. to maintain F -. exclusiviJY. _Although generally speaking, a liberal interpretation must be given to taxing entries., this would not bring within its purview a .. tax on subject-matter which a fair reading of the entry does not cover. If \n substance, the statute is not referable to a field given to the State, the Court will not by any principle of interpretation allow a statute not covered by it to intrude upon this field." G We will therefore !lave to allow the appeals filed by BPL in Civil Appeal Nos. 3329-30. of 2002 and Escatel in Civil Appeal No.2408 of 2002 and remand the matter to the Sales Tax Authorities concerned for determination of the issue relating to SIM Cards in the light of the observations contained in this judgment.

BHARAT SANCHAR NJGAM LTD v. U.0.1. [LAKSHMANAN, J.] 865 As far as the question whether providing of a telephone connection involves interstate sales, now that it has been clarified that electromagnetic waves or radio frequencies are not goods, the issue is really academic.

For the reasons aforesaid, we answer the questions formulated by us earlier in the following manner: B (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 c 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 \ (D) The issue is left unanswered. t (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. E The writ petitions and appeals are disposed of accordingly. No order as to costs.

DR AR LAKSHMANAN, J. I had the privilege of perusing the judgment proposed by my learned Sister - Hon'ble Mrs. Justice Ruma Pal. p While respectfully concurring with the conclusion arrived by the learned Judge, I would like to add the fo !lowing few paragraphs:-

The principal issue that arises in this batch of cases relate to the imposition of sales tax in the light of Article 366(29A) clause (d) on different activities carried on by telecommunication servic;: provider. G The petitioner Bharat Sanchar Nigam Ltd. (for short 'BSNL') Is a licensee under the Indian Telegraph Act, 1885. The licence of the petitioner is obtained from the Government of lndiii which is the same as the licence given also to various private telecom operators which entitles the BSNL to H

SUPREME COURT REPORTS [2006) 2 S.C.R. 866 A carry the activity of operating telegraph limited to the scope of telecommunication facilities.

The entire infrastructure/instruments/appliances and exchange are in the physical control and possession of the petitioner at all times and there is neither any physical transfer of such goods nor any transfer of right to use such equipment or apparatuses.

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; c 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 D 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 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.

In my opinion, none of these attributes are present in the relationship F between a telecom service provider and a consumer 6f such services. On the contrary, the transaction is a transaction of rendition of service. . .

PRE-ENACTING HISTORY

I~ the present case, the history as it prevailed before 46th Amendment G is as follows: The liability to sales tax of the goods involved in composite works .. contract fell for determination before this Court in The State of Madras v. Gannon Dunkerley & Co., (Madras) Ltd, [1959] SCR 379. This Court ruled at page 413 H

SHARAT SANCHARNIGAM LTD v. U.OJ. [LAKSHMANAN, J,] 867

;> "If the words 'sale of goods' have to be interpreted in their legal A " sense, that sense can only be what it has in 'the law relating to sale of goods,''

Since this judgment has been elaborately considered in the main judgment, I am not reproducing the_ ~erdict of this Court occurring at page nos. 41'3, 425, 426 & 427. B The same Constitution Bench in Mithan Lal v. The State of Delhi and ..... Ailr., [1959) SCR 445 at 451 ruled that ')/

··:j "It would, therefore, be competent to Parliament to impose tax on the supply. of materials in. building contracts and to impose it under the c name of sales tax, as. has been d()ne by the Parliament of the ,Commonwealth of Australia or by the-Legislatures of the American States."

ENACTING HISTORY: . D \ As to the meaning of 'enacting history', we can usefully refer to page no. 520 of the Fourth Edition of Francis Bennion Statutory Interpretation. ' "The enacting history of an Act is the surrounding corpus of public knowledge relative to its introduction into Parliament as a Bill, subsequent progress through and ultimate passing by, Parliament. In particular it is the E extrinsic material assumed to be within the contemplation of Parliament when - it passed the Act. A text constituting an item of its enacting history may or may not be expressly mentioned .in the Act. If inspected, it is unlikely to be ~~If-explanatory. On the contrary it will probably require skilled evaluation."

The Statement of Objects and Reasons appended to the Constitution F -_, (Forty-sixth Amendment) Bill 1981 is part of enacting history.

The Statement of Objects and Reasons for the 46th Amendment is, inter alia;- as follows:

"By a series of subsequent decisions, the Supreme Court has, on the G basis of the decision in Gannon Dunkerley's case held various other

--- transactions which resemble, in subs~ance, transaction by way of sales, to be not liable to sales tax. As a result of these decisions, a transaction, in order to be subject to the levy of sales tax under entry 92A of the Union List or

- Q entry 54 of the State List, should have the following ingredients, namely, H

SUPREME COURT REPORTS [2006] 2 S.C.R. 868 A parties competent to contract, mutual assent and transfer of property in goods from one of the parties to the contract to the other party thereto for a price.

This position has resulted in scope for avoidance of tax in various ways. An example of this is the practice of inter-State consignment transfers, B i.e. transfer of goods from head office of a principal in one State to a branch or agent in another State or vice versa or transfer of goods on consignment account, to avoid the payment of sales tax on inter-State sales under the Central Sales Tax Act. While in the case of a works contract, if the contract, treats the sale of material separately from the cost of the labour, the sale of C materials would be taxable but in the case of an indivisible works contract, it is not possible to levy sales tax on the transfer of property in the goods involved in the execution of such contract as it has been held that there is no sale of the materials as such and the property in them does not pass as movables."

D The Parliament had to intervene as the power to levy tax on goods involved in works contract should appropriately be vested in the State legislatures as was pointed out in Gannon and Dunkerly & Co., the passages quoted hereinabove. There were 5 transactions in which, following the principles laid down in Gann.<,>n,_Dunkerly & Co. relating to works contract, this Court ruled that those transactions are not exigiable to sales tax under E various State enactments. The Parliament, therefore, in exercise of its constituent power, by 46th Amendment, introduced Article 366 (29A). The Statement of Objects and Reasons has fully set out the circumstances under which 46th Amendment was necessitated.

F The Amendment introduced fiction by which six instances of transactions were treated as deemed sale of goods and that 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. This definition .- changed the law declared in the ruling in Gannon Dunkerly & Co. only with regard to those transactions of deemed sales. In other respects, law declared G by this Court is not neutralized. Each one of the sub-clauses of Article 366(29A) introduced by the 46th Amendment was a result of ruling of this Court which was sought to be neutralized or modified. Sub clause (a) is the outcome of New India Sugar Mills v. Commnr. Of Sales Tax 14 STC 316 = [1963] Suppl. 2 SCR 459 and Vishnu Agencies v. Commissioner of Sales tax H AIR (1978) SC 449. Sub clause (b) is the result of Gannon Dunerly & Co.,

BHARATSANCHARNIGAMLTDv. U.0.1. [LAKSHMANAN,J.] 869 [1959] SCR 379. Sub clause (c) is the result of K.L. Johar and Company v. A C.T.O., [1965] 2 SCR 112. Sub clause (d) is consequent to A. V. Meiyyappan v. CIT 20 STC 115 (Madras High Court). Sub clause (e) is the result of Jt. Commercial Tax Officer v. YMIA, [1970] I SCC 462. Sub clause (t) is the result of Northern India Caters (India) Ltd. v. Lt. Governor of Delhi [1978] 4 SCC 36 and State of H.P. v. Associated Hotels of India Ltd., 29 STC 474 = B 1912 (I) sec 472.

In the background of the above, the history prevailing at the time of the 46th Amendment and pre-enacting history as seen in the Statement of Objects and Reasons, Article 366 (29A) has to be interpreted. Each fiction by which those six transactions which are not otherwise sales are deemed to be sales independently operates only in that sub clause.

While the true scope of the amendment may be appreciated by overall reading of the entirety of Article 366 (29A), deemed sale under each particular sub clause has to be determined only within the parameters of the provisions in that sub clause. One sub clause cannot be projected into another sub clause and fiction upon fiction is not permissible. As to the interpretation of fiction, particularly in the sales tax legislation, the principle has been authoritatively laid down in the Bengal Immunity Company Ltd. v. State of Bihar and Ors., [1955] 2 SCR 603 at 647.

"The operative provisions of the several parts of Article 286, namely, clause {l){a), clause {l)(b), clause (2) and clause (3) are manifestly · intended to deal with different topics and, therefore, one cannot be projected or read into another." (S.R. Das, J.)"

We can also see page nos. 720 and 721 (P.N. Bhagwati, J.) F --1 NATURE OF TRANSACTION IN THE PRESENT CASE:

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. G 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 H

870 SUPREME-. COURT REPORTS [2006] 2 S.C.R.

A 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.

The modem legislature makes laws to govern a society, which is fast- B moving. It is aware of the changing concepts of the emerging times. The law adapts itself to social, economic, political, scientific and other revolutionary changes.

Traditionally, a contract for carriage of goods or passengers is by roadways, railways, airways and waterways. This is associated with carriage of tangible goods. Such a carrier has no right over the goods of the customer and does not effect transfer of right to use any goods used by the carrier for goods. On this analogy, the Petitioners carry messages. They are only carriers and have neither property in the message nor effects any transfer to the . ~ubscriber~ The advancement of technology should be so absorbed in the interpretation that this method of carriage of message should also be understood as. carriage .of goods and not a transfer of a right to use goods, if any.

The licence clearly manifests that it is one for providing telecommunication service and not for supply of any goods or transfer of right to use any goods. It expressly prohibits transfer or assignment. The E integrity of licence cannot be broken into pieces nor can the telecommunication service rendered by them be so mutilated. Not only this position flows from the t~~s. of contract, this also flows from Section 4 of the Indian Telegraph Act which provides for grant of licence on such conditions and in consideration of such payments as it thinks fit, to any person "to establish, maintain or work at telegraph". The integrity of establishing, maintaining and working is not to be mutilated.

Clause 9 clearly interdicts the licensee provided that licensee will not . -

assign or transfer his rights in any manner whatsoever under the licence to third party. It is impossible to contend that the right to use goods, assuming without conceding that they are goods, which are essential for the rendition of service can never be a transaction or transfer of right to use goods. Nor can the contract between subscribers and licensee viz. service provider be interpreted as involving transfer of right to use goods:

Gannon Dunkerly declared that a transaction of sale of goods has to be under a contract i.e. it is consensual.

BHARATSANCHARNIGAMLTDv. U.O.L [LAKSHMANAN,J.] 871 A

- Section 4 of the Telegraph Act maintains the integrity of subject-matter of the licence viz., "establish, maintain or work ·a telegraph". Therefore, the transaction of service is composite one riot capable of disintegrated. Except in sub-clause (a) in all other sub clauses the transactions are contractual. There is no scope for importing any doctrine of statutory agency of the service provider. Except in the case of sub clause (a) where the transfer B otherwise than in pursuance of contract of property in any goods is deemed to be sale in each one of the other sub clauses the transaction is consensual. The contrast between sub Article (a) and all other sub clauses clearly manifests that the transaction involved in the present dispute are contractual. The fiction operates to deem what is hot otherwise a sale of goods as a sale of goods i.e. even the transfer of a right to use goods is deemed to be a sale of the goods. C 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.

Sale of Goods Act, comprehends two elements, one is a sale and the other is delivery of goods. 20th Century Finance Corporation Limited v. State of Maharashtra, [2000] 6 SCC i2 at 44, ruled that "

(c) where the goods are available for the transfer of right to use the F ---J - \ taxable event on the transfer of right to use any goods is on the transfer which results in right to use and the situs of sale would be the place where the contract is executed and not where the goods are located for use.

(d) In cases where goods are not in existence or where there is an oral G or implied transfer of the right to use goods, such transactions may be effected by the delivery of the goods. In such cases the taxable event would be on the delivery of goods."

It is, therefore, unnecessary to deal with the question of delivery of H

872 SUPREME COURT REPORTS (2006) 2 S.C.R.

A 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.

I am, therefore, of the view that the imposition of sales tax on any B facilities of the telecommunication services is untenable in law. ORDER

Leave granted in the special leave petitions.

C Civil Appeals are disposed of in terms of the judgment delivered by us today in W.P. (C) No. 183/2003 etc. titled-Bharat Sanchar Nigam Ltd v. Union of India and Ors.,

Contempt Petn. No. 365/&., :.• WP(C) No. 183103.

Contempt petition is dismissed.

K.G. Writ Petition and Civil Appeals disposed of Contempt petition dismissed.