Case: State of Uttar Pradesh and Anr. etc. etc Vs. Union of India and Anr

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 September 1, 1998 [ Reported in 1999 (114) STC 288].2. The State, being of the opinion that the second respondent (The Manager, Department of Telecommunications, of the first respondenthereinafter 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(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[By the ConstitutionAmendment) Act, 1982] 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) Section3F of theAct applies to work contracts only and 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.

Reasoning: 24. The learned Additional Solicitor General in support of his contention submitted that the DoT was providing service so it is not liable to tax under the U.P. Act and invited our attention to the second part of the definition of the word business in clause (aa) of Section 2. The definition is extracted above. The word business is defined in relation to business of buying or selling goods. The definition is in two parts. The first part includes among others transfer of the right to use any goods for any purpose (whether or not for a specified period). The second part which excludes any activity in the nature of mere service not involving purchase or sale of goods, reads, "but does not include any activity in the nature of mere service or profession which does not involve the purchase or sale of goods. It is argued that any activity in the nature of mere service or profession is excluded from the definition of the term business and as the DoT is providing service, the same cannot be subjected to tax. In our view, the contention though attractive, is devoid of any substance. There are more answers than one to this contention. The first is that the definition of a dealer takes in a Government, when it sells, supplies, etc. whether in the course of business or otherwise. Therefore, it it not necessary that the activity of sale, etc. by the DoT should be in the course of business. Even assuming that the supply of the telephone to a subscriber, being a service, falls outside the meaning of the term business, the DoT would nonetheless be liable to pay tax under the U.P. Act as a dealer for the simple reason of transferring the right to use the telephone instrument/apparatus and the whole system as that falls within the extended meaning of sale under clause (h) of Section 2 of the U.P. Act. And the second is, only such service is excluded from the definition of the term business which does not involve the purchase or sale of goods. In the instant case, it cannot be legitimately disputed that the service involves installation of instrument and access to the exchange and telephone system as a whole which has been found to fall within the meaning of the term sale. Therefore, the second part of the definition of the term business is of no help to the DoT.25. It was then urged that in providing telephone service by the DoT, installation of instrument/apparatus and appliances is insignificant and in many cases subscribers themselves have their own instruments; the more important part is access to the area exchange and the whole system connected thereto without which the installation is of no consequence and the same remains under the possession and full control of the DoT so there was no transfer of the right to use any goods so as to attract liability under the U.P. Act. We are not persuaded to accept this submission. It is true that under the Rules, referred to above, as service, a number is allotted, an instrument/apparatus and other appliances are installed at the premises of a subscriber and the same are connected with the area exchange to enable him to have access to the whole system, to dial and to receive calls. In our view, it makes no difference whether any subscriber replaces instruments of the DoT with his own instrument because the most important thing is the connection of the subscribers telephone number with the area exchange and that was provided by the DoT. Insofar as the contention of giving possession or control of the whole system of Exchange is concerned, which is said to comprise mostly of immovable property, it needs to be borne in mind that handing over of the possession is not sine qua non of completing the transfer of the right to use any goods. It was so held by a Constitution Bench of this Court in 20th Century Finance Corporation Ltd. and Anr. vs. State of Maharashtra (2000 (6) SCC 12 ). A transfer of the right to use any goods will be complete according to the law laid down by the majority in that case, on completion of the contract to transfer of the right to use the goods. The contention that the area telephone exchanges and other systems would remain under the control of the DoT, are irrelevant to complete such a transfer. Even otherwise, after installation of the instrument and other appliances, once the DoT connects the telephone line of the assigned number of the subscriber to the area exchange, access to other telephones is established. There cannot be denial of the fact that giving such an access would complete the transfer of the right to use the goods. However, reliance is placed on the decision of the High Court of Andhra Pradesh in Rashtriya Ispat Nigam Ltd. vs. Commercial Tax Officer (1990)(77) STC 182) which was affirmed by this Court in State of Andhra Pradesh and another vs. Rashtriya Ispat Nigam Ltd. (2002(126) STC 114). It is unnecessary to deal with these cases in any detail; suffice it to say, in that case there was a finding of fact that the transaction did not involve transfer of the right to use the machinery in favour of contractors and that determined the issue.26. It may be mentioned that during the relevant period (1988) no service tax was enforced. It was in 1994 that service tax was levied for the first time as per Chapter V of the Finance Act, 1994. Section 66 thereof created charge of service tax in regard to taxable services. Service tax is defined in clause (34) of Section 65 to mean tax chargeable under the provisions of that Chapter. Taxable service is defined (under(b) of clause 41 of Section 65) to mean any service provided to, inter alia, a subscriber by the telegraph authority in relation to a telephone connection. No provision of the U.P. Act or the said Finance Act, 1994 or the Constitution of India is brought to our notice to hold that rentals collected by the DoT from the subscriber cannot be subjected to tax as is done under the U.P. Act. Merely because service tax is imposed by the Parliament under the said Finance Act in respect of telephone connection to a subscriber, is no ground to hold that the State cannot levy tax under the U.P. Act.