* THE HON’BLE SRI JUSTICE V.V.S.RAO AND * THE HON’BLE SRI JUSTICE RAMESH RANGANATHAN +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 % Dated 08-09-2011 TAX REVISION CASE No.53 of 2007: # The State of Andhra Pradesh, rep., by the State representative before STAT D. No.5-4-404 to 408, Nampally, Andhra Pradesh, Hyderabad. …. petitioner Vs. $ M/s. Bharat Sanchar Nigam Limited, Hyderabad. …. Respondent ! Counsel for the petitioner: Sri A.V. Krishna koundinya, Learned Special Standing Counsel for Commercial Taxes ^ Counsel for respondent : Sri R.S. Murthy <GIST: > HEAD NOTE: ? Citations: [1] (2006) 3 SCC 1) 2 (2006) 1 ALD (Crl.) 96 (A.P) 3 1959 SCR 379 4 (2004) 5 SCC 632 5 (1989) 2 SCC 645 6 (2010) 35 VST 549 (SC) 7 Judgment in TRC Nos.154, 155, 156, 157, 160, 169, 170, 181, 205 and 243 of 2010 dated: 28.1.2011 8 Judgment in W.P. No.17092 of 2010 & batch dated 23.02.2011 9 Judgment in Civil Appeal No.6319 of 2011 dated 4.8.2011 10 (2000) 137 STC 620 11 2001(4) SCC 593 12 (2010) 5 SCC 122 13 (2004) 4 SCC 751 (DB) 14 Judgment of APHC DB in W.P. No.23811 of 2009 dated: 11.02.2011 15 (2000) 6 SCC 12 THE HON’BLE SRI JUSTICE V.V.S.RAO AND THE HON’BLE SRI JUSTICE RAMESH RANGANATHAN 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 COMMON ORDER: (Per Hon’ble Sri Justice Ramesh Ranganathan) Declaration of the law by the Supreme Court, in Bharat Sanchar Nigam Ltd v. Union of India[1], 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. 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. 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 1st 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. 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. 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[2]). 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: 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. 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. 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.1). 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. 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[3]). 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 & Co3). 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.1). 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”. 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. 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.1; Gannon Dunkerley & Co.3). The classical concept of sale, enunciated in Gannon Dunkerley & Co.3, 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.1). 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[4]). 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.1). 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. 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.1). 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[5]). 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.1). 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.1; Association of Leasing and Financial Service Companies v. Union of India[6]; M/s. G.S. Lamba & Sons, represented by Mr. Gurusharan Singh Lamba v. State of Andhra Pradesh[7]; M/s. Viceroy Hotels Ltd v. The Commercial Tax Officer[8]). 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[9]. The question which arose for consideration, in “IDEA Mobile9”, 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. In view of the law laid down by the Supreme Court, in Idea Mobile Communication9, 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: 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