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CASE NO.: Writ Petition (civil)  183 of 2003

PETITIONER: Bharat Sanchar Nigam Ltd. & Anr.                 

RESPONDENT: Union of India & Ors.                            

DATE OF JUDGMENT: 02/03/2006

BENCH: Ruma Pal & Dalveer Bhandari

JUDGMENT: J U D G M E N T WITH CA.N.2408/2002,3329-30/02 WP (C) NOS.227,223, 372, 450/03,468/05  C.A.Nos.5337-38/01,4278-88/02, WP.(C) No.144-45/04 WP (C) No.149/04, 162/05, CA Nos.6323-25/99, 2517- 18/04, 3086/04, 2471/05

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

The High Courts of Allahabad , Andhra Pradesh , and  Punjab & Haryana   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

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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. 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 Civil Appeals and  writ petitions were listed before two learned Judges, an  order was passed on 25th September, 2003 referring the  matter to a larger Bench as the "nature of the questions  raised is important".         The State respondents have raised a preliminary  objection and contended that the plea of BSNL and the  other petitioners including the Union of India is barred by  res judicata because the issue has been decided by this  Court inter partes in State of U.P.  vs.  Union of India :  (2003) 3 SCC 239 . The plea has been resisted by the petitioners on three  grounds viz., (i) that the issue of the legislative competence  of States to impose sales tax under Entry 54 of List II on  transactions which are purely  rendition of services, was not  raised in that case. (ii) that the decision was without  jurisdiction because of Article 131 of the Constitution, and  (iii) that every assessment year gave rise to a fresh cause of  action.  According to the petitioners in any event the  decision requires reconsideration.          In State of U.P. v. Union of India and Anr. the two  learned Judges of this Court had construed the definition of  ’business’, ’dealer’, ’goods’ and ’sale’ under Sections 2(aa),  (c), (d) and (h) of the U.P. Trade Tax Act respectively to come  to the conclusion that the DoT was a ’dealer’ under the U.P.  Act.  This Court also held that a telephone communication  and other accessories which gave access to the telephone  exchange with or without instruments were ’goods’ and that   transferring the right to use the telephone  instrument/apparatus and the whole system fell within the  extended meaning of "sale" under clause (h) of Section 2 of  the U.P. Act. A consideration of the correctness of this conclusion

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would arise only if we reject the preliminary objection of the  State of U.P. that we are precluded from reopening the  issues so concluded by reason of the principles of res  judicata. Several decisions have been cited in support of  their contention.           In Amalgamated Coalfields Ltd., Vs. Janapada   Sabha 1962 (1) SCR 10 tax was claimed in respect of coal  by the respondents therein.  Notices of demand were sent to  the appellant.  The validity of these notices was challenged  by the appellant by filing a writ petition before this Court.  The writ petition was dismissed and it was held that the  notices served on the appellant were valid.  Notices of  demand were again served on the appellant in respect of a  subsequent period.  The appellant filed another writ petition  this time before the High Court, challenging the validity of  these notices.  The High Court held that the appellant’s  claims were barred by res judicata by reason of the earlier  decision of this Court.  Challenging the decision of the High  Court the appellants approached this Court under Article  136.  In Amalgamated Coalfields Ltd., Vs. Janapada   Sabha (1963) Supp.1 SCR 172 (referred to hereafter as  Amalgamated Coalfields No.(2)), the issue was whether the  doctrine of res judicata applied to writ petitions filed under  Article 226 or to petitions under Article 32.  The Court  noted that the judicial view was that even petitions filed  under Article 32 were subject to the general principle of res  judicata.  The Court then considered whether the principle  would apply to tax cases when the earlier decision was in  respect of a different period and said:- "In a sense, the liability to pay tax from year to  year is a separate and distinct liability; it is  based on a different cause of action from year to  year, and if any points of fact or law are  considered in determining the liability for a given  year, they can generally be deemed to have been  considered and decided in a collateral and  incidental way."

       After considering various earlier authorities on the  issue, it was held that:- "If for instance, the validity of a taxing statute is  impeached by an assessee who is called upon to  pay a tax for a particular year and the matter is  taken to the High Court or brought before this  Court and it is held that the taxing statute is  valid, it may not be easy to hold that the decision  on this basic and material issue would not  operate as res judicata against the assessee for a  subsequent year.  That, however, is a matter on  which it is unnecessary for us to pronounce a  definite opinion in the present case.  In this  connection, it would be relevant to add that even  if a direct decision of this Court on a point of law  does not operate as res judicata  in a dispute for  a subsequent year, such a decision would, under  Art. 141, have a binding effect not only on the  parties to it, but also on all courts in India as a  precedent in which the law is declared by this  Court.  The question about the applicability of res  judicata  to such a decision would thus be a  matter of merely academic significance".  (Emphasis ours)

After refraining from expressing any final opinion on  the applicability of res judicata to assessment orders for

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successive years, the Court was quite unequivocal in  expressing an opinion on the applicability of the principles  of constructive res judicata.   

"In our opinion, constructive res judicata  which is  a special and artificial form of res judicata   enacted by S. 11 of the Civil Procedure Code  should not generally be applied to writ petitions  filed under Art.32 or Art.226.  We would be  reluctant to apply this principle to the present  appeals all the more because we are dealing with  cases where the impugned tax liability is for  different years".   

It was held that in any event:

"\005.the appellants cannot be precluded from  raising the new contentions on which their   challenge against the validity of the notices is  based".  

       The question in M/s. Radhasoami Satsang Vs.  Commissioner of Income Tax 1992(1) SCC 659  (also  cited by the State of U.P.)  was whether the Tribunal was  bound by an earlier decision in respect of an earlier  assessment year that the income derived by the  Radhasoami Satsang, a religious institution, was entitled to  exemption under Sections 11 and 12 of the Income Tax Act,  1961.  The Court said:- " We are aware of the fact that strictly speaking  res judicata does not apply to income tax  proceedings.  Again, each assessment year being  a unit, what is decided in one year may not apply  in the following year but where a fundamental  aspect permeating through the different  assessment years has been found as a fact one  way or the other and parties have allowed that  position to be sustained by not challenging the  order, it would not be at all appropriate to allow  the position to be changed in a subsequent year,  unless there was any material change justifying  the Revenue to take a different view of the  matter".

           Amalgamated Coalfields case No.2 (supra) was  distinguished in the case of  Devi Lal Modi Vs. Sales Tax  Officer 1965 (1) SCR 86 in which the challenge was to  assessment proceedings under the Madhya Bharat Sales  Tax Act, 1950. The writ petition was dismissed by the High  Court.  The special leave petition was also dismissed.  The  same order of assessment was challenged by filing a second  writ petition before the High Court.  This was also  dismissed by the High Court. The question, before this  Court was whether it was open to the appellant to challenge  the validity of the same order of assessment twice by two  consecutive writ petitions under Article 226.  The Court  acknowledged that in regard to the orders of assessment for  different years, the position may be different and said:-

"Even if the said orders are passed under the  same provisions of law, it may theoretically be  open to the party to contend that the liability

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being recurring from year to year, the cause of  action is not the same; and so, even if a citizen’s  petition challenging the order of assessment  passed against him for one year is rejected, it  may be open  to him to challenge a similar  assessment order passed for the next year.  In  that case, the court may ultimately adopt the  same view which had been adopted on the earlier  occasion; but if a new ground  is urged, the court  may have to consider it on the merits, because,  strictly speaking the principle of res judicata may  not apply to such a case.  That, in fact, is the  effect of the decision of this Court in the  Amalgamated Coalfields Ltd. and Anr. V. The  Janapada Sabha, Chhindwara (1963) Supp.1  SCR.172\005\005\005\005\005\005\005\005..In our opinion, the said  general observations must be read in the light of  the important fact that the order which was  challenged in the second writ petition was in  relation to a different period and not for the same  period as was covered  by the earlier petition."

But as far as a challenge to the same assessment  order is concerned, it was held:- "that if constructive res judicata is not applied to  such proceedings a party can file as many writ  petitions as he likes and take one or two points  every time.  That clearly is opposed to  considerations of public policy on which res  judicata  is based and would mean harassment  and hardship to the opponent.  Besides, if such a  course is allowed to be adopted, the doctrine of  finality of judgments pronounced by this Court  would also be materially affected.  We are,  therefore, satisfied that the second writ petition  filed by the appellant in the present case is  barred by constructive res judicata".

       Rupa Ashok Hurra vs. Ashok Hurra (2002) 4 SCC  388 considered whether this Court can set aside its earlier  decision inter partes under Article 32.  In paragraph 14, the  Court said: "On the analysis of the ratio laid down in the  aforementioned cases, we reaffirm our considered  view that a final judgment/order passed by this  Court cannot be assailed in an application under  Article 32 of the   Constitution of India by an aggrieved person,  whether he was a party to the case or not.

Nevertheless, we think that a petitioner is entitled  to relief ex debito justitiae if he establishes (1)  violation of the principles of natural justice in that  he was not a party to the lis but the judgment   adversely affected his interests or, if he was a  party to the lis, he was not served with notice of  the proceedings and the matter proceeded as if he  had notice, and (2) where in the proceedings a  learned Judge failed to disclose his connection  with the subject-matter or the parties giving scope  for an apprehension of bias and the judgment  adversely affects the petitioner".

To a similar effect is the case of Junior Telecom  Officers Forum and Ors. vs. Union of India & Ors (1993)

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Supp. 4 SCC 693 where the appellants had intervened in  earlier proceedings.  After the controversy was decided in  those proceedings the appellants sought to reagitate the  same issues in respect of the same matter contending that  they had no opportunity of being heard. The submission  was rejected and it was held that the second round was  impermissible.   The decisions cited have uniformly held that res  judicata does not apply in matters pertaining to tax for  different assessment years because res judicata applies to  debar Courts from entertaining issues on the same cause of  action whereas the cause of action for each assessment year  is distinct. The Courts will generally adopt an earlier  pronouncement of the law or a conclusion of fact unless  there is a new ground urged or a material change in the  factual position. The reason why Courts have held parties to  the opinion expressed in a decision in one assessment year  to the same opinion in a subsequent year is not because of  any principle of res judicata but because of the theory of  precedent or the precedential value of the earlier  pronouncement.  Where facts and law in a subsequent  assessment year are the same, no authority whether quasi  judicial or judicial can generally be permitted to take a  different view.  This mandate is subject only to the usual  gateways of distinguishing the earlier decision or where the  earlier decision is per incuriam.  However, these are fetters  only on a coordinate bench which, failing the possibility of  availing of either of these gateways, may yet differ with the  view expressed and refer the matter to a bench of superior  strength or in some cases to a bench of superior  jurisdiction.        In our opinion, the preliminary objection raised by the  State of U.P. therefore, rests on a faulty premise. The  contention of the petitioners/appellants in these matters is  not that the decision in State of U.P.  vs.  U.O.I (supra) for  that assessment year should be set aside, but that it should  be overruled as an authority or precedent. Therefore, the  decisions in  Devi Lal Modi vs. Sales Tax Officer  (supra)  and in Hurra vs Hurra (supra) are not germane.  A decision can be set aside in the same lis on a prayer  for review or an application for recall or Under Art. 32 in the  peculiar circumstances mentioned in Hurra vs. Hurra.   As  we have said overruling of a decision takes place in a  subsequent lis where the precedential value of the decision  is called in question.  No one can dispute that in our  judicial system it is open to a Court of superior jurisdiction  or strength before which a decision of a Bench of lower  strength is cited as an authority, to overrule it.  This  overruling would not operate to upset the binding nature of  the decision on the parties to an earlier lis in that lis, for  whom the principle of res judicata  would continue to  operate. But in tax cases relating to a subsequent year   involving the same issue as an earlier year, the court can  differ from the view expressed if the case is  distinguishable  or per incuriam. The decision in State of U.P. vs. Union of  India  related to the year 1988. Admittedly, the present  dispute relates to a subsequent period.  Here a coordinate  Bench has referred the matter to a Larger Bench.  This  Bench being of superior strength, we can, if we so find,   declare that the earlier decision does not represent the law.     None of the decisions cited by the State of U.P. are  authorities for the proposition that we cannot, in the  circumstances of this case, do so.  This preliminary  objection of the State of  U.P. is therefore rejected. Coming now to the merits of the case, the petitioners

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contended that the service providers are licencees under  Section 4 of the Telegraph Act, 1885 and provide  ’telecommunication services’ as provided under Section 2(k)  under the Telecom Regulatory Authority of India Act, 1997.   Service tax is imposed on them under the Finance Act, 1994  on the basis of the tariff realised from the subscribers.   They further contended that in providing such service there  is in fact no ’sales’ effected by the service providers and that  the States do not have the legislative competence to impose  sales tax on the rendition of telecommunication services.   Article 366 (29A) which extended the definition of ’sale’ in  the Constitution did not apply to the transaction in  question.  Clause (d) of Article 366(29-A) relied upon by the  respondents contemplates  a transfer of a legal right to use  goods.  According to the petitioners there is no transfer of  any legal right by the service providers nor any delivery of  any goods which may be covered under the Telegraph Act,  1885 as the same is barred and prohibited in terms of the  licence granted to service providers under Section 4 of that  Act.  It is submitted without a delivery of goods, there could  be no transfer of any right to use those goods as  contemplated under Article 366(29-A)(d).  It is the  petitioners’ case that the decision in State of U.P. Vs.   Union of India  (supra)  was erroneous not only because it  held that the telephone connection and all other accessories  which gives access to the telephone exchange with or  without instruments are goods but also because there was  in fact no transfer of any of these equipment to a  subscriber.  The predominant element and intention in the  transaction was one of service and not of sale.   It is  submitted that taxing telecommunication services as a  deemed sale under Entry 54 of List II would be violative of  Article 286 of the Constitution as the same involves  connecting subscribers throughout the territories of India  without any regard to State boundaries.   On the interpretation of Article 366(29A) it was  submitted that the fiction in one clause could not be read in  to the other.  It is said that the disintegration of composite  transactions has to be specifically enabled by the  Constitution and that it was not within the competence of  State legislation to divide a composite transaction  otherwise.  It is also submitted that the language of clause  (d) was distinct from the language used in clause (b) of  Clause 29A of Article 366.  Our attention was drawn to the  absence of the use of the word "involved" in the former sub  clause.  It is emphasized that there must be goods of which  the right to transfer is covered by sub clause (d) of clause  29A of Article 366.  It is contended that there was no  transfer of any right to use any goods and the parties never  intended for such transfer.  It is submitted that the court  should apply the standard of the ordinary man for deciding  whether the transaction in question was a contract for  service or for transfer of a right to use deemed goods.  The  obligation of the service provider is merely to transmit voice  and the subscriber was not interested in stipulating as to  how the voice/data is to be conveyed to the other end.  It is  for the service provider to choose the medium as it thinks  fit.  The SIM card was not goods it merely enables  activation. According to the petitioners prior to the 46th  amendment composite contracts were not exigible to States  sales tax under Entry 54, List II.  The legal fiction created in  Article 366(29A) provided for specific composite contracts to  be subjected to sales tax.  Therefore, even after the 46th  amendment other transactions had been held not to be

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sales.  Reliance has been placed on the Everest Copiers vs.  State of Tamil Nadu (1996) 5 SCC 390, Rainbow vs,  State of Madhya Pradesh (2000) 2 SCC 385 and   Hindustan Aeronautics vs. State of Karnataka (1984) 1  SCC 707.  It was contended in addition that the restrictions  regarding the States inability to tax interstate sales  would  continue to apply.  Furthermore, the activity of providing  the connection involved the use of instruments embedded to  the earth or attached to what is embedded in the earth and  therefore was immoveable property and outside the scope of  sales tax. Thus there were no goods nor any transfer of any  goods involved in the activity.          It is pointed out that none of the States could contend  that telecommunication was not a service.  It was submitted  that the service did not allow for transfer of right to use  goods.  There was no transfer of control or equipments at  any stage.  It is submitted that what the service providers  provide was a means of communication and what was  transferred was the sounds of the message or signals which  were generated by the subscribers themselves.  It is further  submitted that the SIM card was merely an identification  device for granting access and was a means to access  services.           The service providers in the appeal from the decision of  Kerala High Court have submitted that the High Court had  not appreciated  the facts .  The service providers had  imported the SIM cards and sold them to franchises who  then sold them to the subscribers.  It is submitted that the  authorities had wrongly proceeded on the basis that there  was a sale of SIM cards by the service providers to the  subscribers.  It is pointed out that the sale was factually  and legally distinct from the activity of giving the connection  or activation of the SIM cards.  The decision of the Kerala  High Court has also been impugned on the ground that it  overlooked inter alia questions of competence raised by the  petitioners, the explanation to the definition of turnover as  well as the ratio of Gannon Dunkerley and misapplied the  aspect theory.           As we have noted earlier, the Union of India has  supported the service providers and contended that the  transaction in question was only "service".      It has been argued on behalf of the State of Uttar  Pradesh that the writ petition had been filed by BSNL  challenging Sections 2(h) and 3F of the U.P. Trade Tax Act,  1948.  The challenge was expressly given up and therefore  the petition was not maintainable.  It was also submitted  that there were different factual scenarios as a result of  which the possible outcome of a particular assessment  could not be predicted and it was not appropriate to  intervene under Article 32.  According to the State, no  fundamental right was allegedly infringed.  It is contended  that the Central Government has the exclusive monopoly  over "telegraphs" under the Telegraph Act, 1985.  A  "telegraph" as defined in that Act would cover the  transactions in question.  In granting permission to the  service providers by the issue of licence, there was transfer  of the right to use the telegraph which right was further  given to the subscribers in a transaction which would be  covered by Article 366(29A)(d).  On the interpretation of  Article 366(29A) it has been submitted that prior to the   introduction of 92C in List I, the residuary entry could not  be relied upon in view of the specific entry in Entry 54 of  List II. It has been submitted inter alia that delivery of the  goods was not necessary for the purpose of transferring the  right to use and this had been held in the decision of this

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Court in 20th Century Finance Corporation Ltd. and Anr.  v. State of Maharashtra (2000) 6 SCC 12. It is submitted  that in any event different aspects of a given transaction  can fall within the legislative competence of two legislatures  and both would have the power to tax that aspect.  It is  submitted that the question whether the goods were  moveable or immoveable property as well as the question  whether the tax was being levied on inter state sales or not  were all matters of assessment and that the judgment in  State of U.P. vs. Union of India should be affirmed.  In addition, it has  been submitted for the respondents  that the expression "telephone" and "telephony" do not  necessarily include the factor of service. A subscriber makes  use of the telephone system as a matter of right and is  capable of asserting that right even against the  Government. The subscriber’s right to use his telephone  line is to the exclusion of every other person and to that  extent the right of the Government/service providers stands  denuded. The right is based on contract and is in addition  to the right to the service provided by the service providers.   The SIM Card operates as key for access to the telephone  system or network and symbolizes the right of participation  by a subscriber in the telephone system.  These are two  distinct transactions, one as the transferree of the legal  right to use the telephone and the other of a contract of  service. These are two different aspects, each attracting a  different tax.  Service is only one of the purposes for which  the transfer or deemed sale is made by the Government.   The Government may among other rights also allow the  licencee to give telephone connection as its agent or act as a  service provider for the establishment, maintenance and  working of the telephone system.  The use of the words "any  goods" in sub-clause (d) of (29A) of Article  366 according to  the respondents showed that the goods need not necessarily  have been transferred  by the transferor.  No delivery was in  fact required under sub-clause (d). It is further emphasised  that sub-clause (d) also use the words "for any purpose".   This could include the purpose of service. In any event, it is  submitted, the meaning and scope of sub-clause (d) in  Article 366 (29A) cannot be limited on account of the fact  that a transaction may have been described  as a service in  any legislative enactment or contract or licence.   Similarly,  the expression "goods" had a very wide and comprehensive  meaning and assuming delivery is necessary would include  the entire telephone system as well as telephone appliances,  instruments, materials, towers, exchanges, etc.  The means,  namely the electrical or electro magnetic means of energy  will also form parts of the goods. It is further submitted that  whether in any particular case the telephone system  included machines or apparatus fixed to the ground was a  question of fact to be decided in an individual case during  the assessment proceedings. Countering  the submission  that the sales would be inter state sales, it is submitted that  the situs of the taxable event under the Sales Tax Act would  be where the transfer of the right takes place between the  service providers and the subscribers.  This was also a  question which would vary from case to case and would  have to be ultimately factually decided by an assessment  authority.  According to the respondents, apart from the  transfer aspect of the transaction being isolated as an  independent taxable  event from the aspect of service,  ultimately the question whether there was any splitting up  of a composite transaction  was also to be determined  during assessment proceedings. It was submitted that the mere fact that the Union was

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levying tax on certain taxable services could not be used to  deny the State’s powers to tax the objects/provisions in the  service.  Therefore, the State’s powers must be read  harmoniously with the Union’s power and it is only when  such reconciliation is impossible that the primacy should be  given to the non obstante clause under Article 248(1).   Alternatively it was submitted that the theory of aspect  would apply so that what was service in one aspect was a  sale in the other. It was also submitted that because in sub- clauses (b) and (f) of Clause (29A) of Article 366 the tax on a   component in a transaction of works is permissible, it  cannot be assumed that in sub-clause (d) tax could not be  imposed on an element of the sale component of that  transaction. The sub-clause has no words or limitations  and must be read as broadly as the language permitted.  It  was submitted that the test of dominant object of a  composite works contract was no longer relevant after the  46th Constitutional Amendment. It was submitted that the  service providers transfer the right to use  radio frequency  channel to a subscriber for a specific duration and thus  have effected a deemed sale of goods under Article 366 (29A)  (d). These broadly speaking are the respective contentions  and in our opinion, the issues which arise for consideration  in these matters are:- A)      what are "goods" in telecommunication  for  the purposes of Article 366 (29A)(d)?

B)      is there any transfer of any right to use any  goods by providing access or telephone  connection by the telephone service provider  to a subscriber ?

C)      is the nature of the transaction involved in  providing telephone connection a composite  contract of service and sale? If so, is it  possible for the States to tax the sale  element?

D)      If the providing of a telephone connection  involves sale is such sale an inter state one?

E)      Would the "aspect theory" be applicable to the  transaction enabling the States to levy sales  tax on the same transaction in respect of  which the Union Government levies service  tax.

    Before taking up the issues for decision seriatim, it is  necessary for us to deal with the two further preliminary  objections raised by the respondents on the merits.   Regarding the first of such objections that the writ petitions  have become infructuous - it may be true that in relation to  the U.P. Trade Tax Act,1948, the challenge to Section 2(h)  and 3F which have basically re-produced Article 366(29A)  has not been pressed by the petitioners.  What has been  argued however, is for a construction of Article 366(29A)  particularly, clause (d) thereof.  That construction, if  accepted by the Court, would be sufficient to grant the  petitioners the relief claimed.  The issue of interpretation of  Article 366(29A) is, therefore, a live one.  

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The second objection was that the writ petitions under  Article 32 were not maintainable. The writ petitions raised  questions relating to the competence of the States to levy  sales tax on telecommunication service.  This is not an  issue which could have been raised and decided by the  assessing authorities.   If the State Legislatures are  incompetent to levy the tax, it would not only be an  arbitrary exercise of power by the State authorities in  violation of Article 14, it would also constitute an  unreasonable restriction upon the right of the service  providers to carry on trade under Article 19(1)(g).  (See  Bengal Immunity Company V. State of Bihar 1955 (2)  SCR 603; Himmatlal Harilal Mehta V. State of Madras  1954 SCR 1122.)  We are consequently unable to accept  either of these contentions of the respondents.  To answer the questions formulated by us, it is  necessary to delve briefly into the legal history of Art. 366  (29A). Prior to the 46th Amendment, composite contracts  such as works contracts, hire-purchase contacts and  catering contracts were not assessable as contracts for sale  of goods. The   locus classicus  holding  the field was State  of Madras V. Gannon Dunkerley & Co. IX STC 353 (SC).  There this Court held that the words "sale of goods" in  Entry 48 of List II, Schedule VII to the Government of India  Act, 1935 did not cover the sale sought to be taxed by the  State Government under the Madras General Sales Tax Act,  1939.  The classical concept of sale was held to apply to the  entry in the legislative list in that there had to be three  essential components to constitute a transaction of sale--   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 it was  held that there was no sale.  Therefore, a contract under  which a contractor agreed to set up a building would not be  a contract for sale. It was one contract, entire and  indivisible and there was no separate agreement for sale of  goods justifying the levy of sales tax by the provincial  legislatures. "Under the law, therefore, there cannot be an  agreement relating to one kind of property and a sale as  regards another". Parties could have provided for two  independent agreements, one relating to the labour and  work involved in the execution of the work and erection of  the building and the second relating to the sale of the  material used in the building in which case the latter would  be an agreement to sell and the supply of materials  thereunder, a sale. Where there was no such separation,  the contract was a composite one. It was not classifiable as  a sale.  The Court accepted the submission of the assessee  that the expression "sale of goods" was, at the time when  the Government of India Act, 1935 was enacted, a term of  well recognized legal import in the general law relating to  sale of goods and must be interpreted in Entry 48 in List II  of Schedule VII of the 1935 Act  as having the same  meaning as in the Sale of Goods Act, 1930.  According to  this decision if the words "sale of goods" have to be  interpreted in their legal sense, that sense can only be what  it has in the law relating to sale of goods. To use the  language of the Court: " To sum up, the expression "sale of goods" in  Entry 48 is a nomen juris, its essential  ingredients being an agreement to sell movables  for a price and property passing therein pursuant  to that agreement. In a building contract which is,  as in the present case, one, entire and indivisible  - and that is its norm, there is no sale of goods,

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and it is not within the competence of the  Provincial Legislature under Entry 48 to impose a  tax on the supply of the materials used in such a  contract treating it as a sale".          Following the ratio in Gannon Dunkerley, that "sale"  in Entry 48 must be construed as having the same meaning  which it has in the Sale of Goods Act, 1930,  this Court  as  well as the High Courts held that several composite  transactions in which there was an element of sale were not  liable to sales tax.  Thus in the State of Punjab V. M/s. Associated  Hotels of India Ltd. (1972) 1 SCC 472 the  question was  whether the meals served at hotels to the residents were  subject to sales tax. The Court held that if the difference is  not distinct, the Revenue would not be entitled to split up  the contract, estimate approximately the charges for such  materials and treat them as chargeable on the mere ground  that the transaction involved transfer of goods, whose value  must have been taken into consideration while fixing  charges for the service. In 1967 the Madras High Court in A.V. Meiyappan vs.  Commissioner of Commercial Taxes, Board of Revenue,  Madras and Anr. (1967) XX STC 115 had to consider a  situation where the Sales Tax Authorities had held that  though the transaction was described as a lease for 49  years, the assessee had effected a sale of the negative print  of a picture for a consideration and therefore the  transaction was liable to sales tax under the Madras  General Sales Tax Act, 1959. The Court set aside the  demand holding that the transaction did not connote a sale  at all and it was therefore not liable to sales tax.  The problem relating to the power of States to levy tax  on the sale of goods was then referred to the Law  Commission by the Government of India.  The Law  Commission submitted its report in 1974 on a  consideration of the scope of the levy of sales tax by State  Governments in respect of works contracts, hire purchase  transactions and also  the transfer of controlled  commodities by virtue of statutory orders. The Law  Commission noted that these transactions resembled sales  in substance  and suggested three drafting devices for  conferring the power of taxing these transactions on the  States viz. (a)     amending State List, entry 54, or (b)     adding a fresh entry in the State List, or (c)     inserting in article 366 a wide definition of  "sale" so as to include works contracts.

         The Commission preferred the last alternative.  Recommendation (c) of the Law Commission to amend  Article 366 by expanding the definition of sale to include the  transactions negatived by Courts, was accepted by the  Government. The Constitution (46th Amendment) Bill 1981,  which was subsequently enacted as the Constitution 46th  Amendment Act 1982 set out the background in which the  amendment to Article 366 (29A) of the Constitution was  amended.  Having noted the various decisions of the  Supreme Court as well as of the High Courts excluding  certain transactions from the scope of sale for the purpose  of levy of sales tax, it was said that the position had  resulted in scope for avoidance of tax in various ways. In  the circumstances, it was considered desirable to put the  matter beyond any doubt.  Article 366 was therefore  amended by inserting a definition of "tax on the sale or  purchase of goods" in Clause (29A). The definition  reads:

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"[(29-A) "tax on the sale or purchase of  goods" includes \026          (a)     a tax on the transfer, otherwise  than in pursuance of a contract,  of property in any goods for  cash, deferred payment or  other valuable consideration;

(b)     a tax on the transfer of property  in goods (whether as goods or  in some other form) involved in  the execution of a works  contract;

(c)     a tax on the delivery of goods  on hire-purchase or any system  of payment by instalments;

(d)     a tax on the transfer of the right  to use any goods for any  purpose (whether or not for a  specified period) for cash,  deferred payment or other  valuable consideration;

(e)     a tax on the supply of goods by  any unincorporated association  or body of persons to a member  thereof for cash, deferred  payment or other valuable  consideration;

(f)     a tax on the supply, by way of  or as part of any service or in  any other manner whatsoever,  of goods, being food or any  other article for human  consumption or any drink  (whether or not intoxicating),  where such supply or service, is  for cash, deferred payment or  other valuable consideration,  

and such transfer, delivery or supply of  any goods shall be deemed to be a sale of  those goods by the person making the  transfer, delivery or supply and a purchase  of those goods by the person to whom such  transfer, delivery or supply is made;      Clause (a) covers a situation where the consensual  element is lacking.  This normally takes place in an  involuntary sale.  Clause (b) covers cases relating to works  contracts.  This was the particular fact situation which the  Court was faced with in Gannon Dunkerley and which the  Court had held was not a sale. The effect in law of a transfer  of property in goods involved in the execution of the works  contract was by this amendment deemed to be a sale.  To  that extent the decision in Gannon Dunkerley was directly  overcome.  Clause (c) deals with hire purchase where the  title to the goods is not transferred.  Yet by fiction of law, it

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is treated as a sale.  Similarly the title to the goods under  Clause (d) remains with the transferor who only transfers  the right to use the goods to the purchaser.  In other words,  contrary to A.V. Meiyappan’s decision a lease of a negative  print of a picture would be a sale. Clause (e) covers cases  which in law may not have amounted to sale because the  member of an incorporated association would have in a  sense begun both the supplier and the recipient of the  supply of goods. Now such transactions are deemed sales.  Clause (f) pertains to contracts which had been held not to  amount to sale in State of Punjab vs. M/s. Associated  Hotels of India Ltd. (supra).  That decision has by this  clause been effectively legislatively invalidated.    All the clauses of Article 366 (29A) serve to bring  transactions where one or more of the essential ingredients  of a sale as defined in the Sale of Goods Act 1930 are  absent, within the ambit of purchase and sales for the  purposes of levy of sales tax. To this extent only is the  principle enunciated in Gannon Dunkerly limited.  The  amendment especially allows specific composite contracts  viz. works contracts (Clause (b)), hire purchase contracts  (Clause (c)), catering contracts (Clause (e)) by legal fiction to  be divisible contracts where the sale element could be  isolated and be subjected to sales tax.

  Gannon Dunkerley survived the 46th  Constitutional  Amendment in two respects.  First with regard to the  definition of ’sale’ for the purposes of the Constitution in  general and for the purposes of Entry 54 of List II in  particular except to the extent that the clauses in  Art.366(29A) operate. By introducing separate categories of  ’deemed sales’,  the meaning of the word ’goods’ was not  altered.    Thus the definitions of the composite elements of  a sale such as intention of the parties, goods, delivery etc.  would continue to be defined according to known legal  connotations. This does not mean that the content of the  concepts remain static. Courts must move with the times.    But the 46th Amendment does not give a licence  for  example to assume that a transaction is a sale  and then to  look around for what could be the goods. The word "goods"  has not been altered by the 46th Amendment. That  ingredient of a sale continues to have the same definition.  The second respect in which Gannon Dunkerley has  survived is with reference to the dominant nature test to be  applied to a composite transaction not covered by Article  366(29A). Transactions which are mutant sales are limited  to the clauses of Article 366(29A).  All other transactions  would have to qualify as sales within the meaning of Sales  of Goods Act 1930 for the purpose of levy of sales tax. Of all the different kinds of composite transactions the  drafters of the 46th Amendment chose three specific  situations, a works contract, a hire purchase contract and a  catering contract to bring within the fiction of a deemed  sale.  Of these three, the first and third involve a kind of  service and sale at the same time.  Apart from these two  cases where splitting of the service and supply has been  Constitutionally permitted in clauses (b) and (g) of Clause  29A of Art. 366, there is no other service which has been  permitted to be so split.  For example the clauses of Art.  366(29A) do not cover hospital services.  Therefore, if during  the treatment of a patient in a hospital, he or she is given a  pill,  can the sales tax authorities tax the transaction as a  sale?  Doctors, lawyers and other professionals render  service in the course of which can it be said that there is a  sale of goods when a doctor writes out and hands over a

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prescription or a lawyer drafts a document and delivers it to  his/her client?  Strictly speaking with the payment of fees,  consideration does pass from the patient or client to the  doctor or lawyer for the documents in both cases.         The reason why these services do not involve a sale for  the purposes of Entry 54 of List II is, as we see it, for  reasons ultimately attributable to the principles enunciated  in Gannon Dunkerley’s case, namely, if there is an  instrument of contract which may be composite in form in  any case other than the exceptions in Article 366(29-A),  unless the transaction in truth represents two distinct and  separate contracts and is discernible  as such, then the  State 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 therefore for composite contracts other  than those mentioned in Article 366 (29A) continues to be -  did the parties have in mind or intend  separate rights  arising out of the sale of goods.  If there was no such  intention there is no sale even if the contract could be  disintegrated. The test for deciding whether  a contract falls  into one category or the other is to as what is ’the substance  of the contract . We will, for the want of a better phrase, call  this the dominant nature test.         In Rainbow Colour Lab & Anr. vs. State of M.P. &  Ors. (2000) 2 SCC 385, the question involved was whether  the job rendered by the photographer in taking  photographs, developing and printing films would amount  to a "work contract"  as contemplated under Article 366  (29A) (b) of the Constitution read with  Section 2(n) of the  M.P. General Sales Tax Act for the purpose of  levy of sales  tax on the business turnover of the photographers.   The Court answered the  questions in the negative  because, according to the Court:- " Prior to the amendment of Article 366, in  view of the judgment of this Court in State  of Madras v. Gannon Dunkerley & Co.  (Madras) Ltd. (1958) 9 STC 353: AIR  1958 SC 560 the States could not levy  sales tax on sale of goods involved in a  works contract because the contract was  indivisible.  All that has happened in law  after the 46th Amendment and the  judgment of this Court in Builders’ case  (1989) 2 SCC 645 is that it is now open to  the States to divide the works contract into  two separate contracts by a legal fiction: (i)  contract for sale of goods involved in the  said works contract, and (ii) for supply of  labour and service.  This division of  contract under the amended law can be  made only if the works contract  involved a  dominant intention to transfer the property  in goods and not in contracts where the  transfer in property takes place as an  incident of contract of  service\005\005\005\005..What is pertinent to  ascertain in this connection is what was  the dominant intention of the  contract\005\005On facts as we have noticed  that the work done by the photographer  which as held by this Court in STO vs.  B.C. Kame (1977) 1 SCC 634 is only in  the nature of a service contract not  involving any sale of goods, we are of the  opinion that the stand taken by the

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respondent State cannot be sustained".  

This conclusion was doubted in Associated Cement  Companies Ltd. Vs. Commissioner of Customs  (2001) 4  SCC 593 saying :- "The conclusion arrived at in Rainbow Colour  Lab case [(2000) 2 SCC 385)], in our opinion,  runs counter to the express provision contained in  Article 366(29-A) as also of the Constitution  Bench decision of this Court in Builders Assn. of  India vs. Union of India (1989) 2 SCC 645".

We agree.  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.  Therefore when in 2005, C.K. Jidheesh vs.  Union of India (2005) 8 SCALE 784  held that the  aforesaid observations in Associated Cement (supra) were  merely obiter and that Rainbow Colour Lab (supra) was  still good law,  it was not correct.  It is  necessary to note  that Associated Cement did not say that in all cases of  composite transactions the 46th Amendment would apply. 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."  The U.P. Trade  Tax defines "goods" as meaning: "every kind or class of movable property and  includes all material commodities and articles  involved in the execution of a works contract, and  growing crops, grass, trees and things attached  to or fastened to anything permanently attached  to the earth which under the contract of sale are  agreed to be severed but does not include  actionable claims, stocks, shares, securities or  postal stationery sold by the Postal Department.’         The State Sales Tax legislations have, subject to minor  variations, adopted substantially a similar definition of  "goods" for the purpose of  their Sales Tax Acts.  There have  been several decisions of this Court on the interpretation of  the word ’goods’ in the context of different State sales tax  enactments. One of the such decisions was the case of  Anraj V. Government of Tamil Nadu (1986) 1 SCC 414 in  which the question was whether sale of a lottery ticket was  a sale of goods for the purpose of Entry 54 of List II.  This  Court held that the sale of a lottery ticket  confers on the  purchaser thereof two rights, (a) right to participate in the  draw and, (b) a right to claim a prize contingent upon his

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being successful in the draw.  It was held that the first was  a right "in praesenti" and the second a contingent right.    It  was concluded that of these  two rights the right to  participate in a draw was "goods" for the purpose of levying  sales tax.  The decision was followed by a Bench of three  Judges in the case of  Vikas Sales Corporation V.  Commissioner of Commercial Tax (1996) 4 SCC 733  to  hold that REP licences/Exim scrips were goods on the sale  of which sales tax could be levied.  Both the decisions were  doubted in the case of Sunrise Associates V. Government  of NCT of New Delhi (2000) 10 SCC 420  In that case, the  Court formed a prima facie opinion that the decision in  Anraj required re-consideration on the view that  the only  right of the purchaser of a lottery ticket is to take a chance  of winning the prize and that there was no good reason to  split the transaction of the sale of a lottery ticket into the  acquisition of (i) the right to participate in the lottery draw  and (ii) right to win the prize depending on chance.           The judgment in that decision is awaited.  For the time  being, we will assume that an incorporeal right is ’goods’, In fact the question whether ’goods’ for the purpose of  sales tax may be intangible or incorporeal need not detain  us. In Associated Cement Companies Ltd. Vs.  Commissioner of Customs (2001)4 SCC 593, the value of  drawings was added to their cost since they contained and  formed part of the technical know-how which was part of a  technical collaboration between the  importer of the   drawings and their exporter. It was recognized knowledge in  the abstract may not come within the definition of ’goods’ in  Section  2(22) of the Customs Act.         This view was adopted in Tata Consultancy Services  Vs. State of Andhra Pradesh (supra) for the purposes of  levy of sales tax on computer software. It was held:- "A "goods" may be a tangible property or  an intangible one.  It would become goods  provided it has the attributes thereof  having regard to    (a) its utility; (b) capable  of being bought and sold; and (c) capable  of being transmitted, transferred,  delivered, stored and possessed.  If a  software whether customized or non-  customised satisfies these attributes, the  same would be goods".  This in our opinion, is the correct approach to the  question as to what are  "goods" for the purposes of sales  tax. We respectfully adopt the same.   The State respondents in their submissions had  initially differed  as to what constituted ’goods’ in  telecommunication.  Ultimately, the consensus among the  respondents appeared to be that the "goods" element in  telecommunication were the electromagnetic waves by  which data generated by the subscriber was transmitted to  the desired destination. The inspiration for the  argument  has been derived from the provisions of the Indian  Telegraph Act, 1885 which defines telegraph  as meaning: "telegraph’ means any appliance, instrument,  material or apparatus used or capable of use for  transmission or reception of signs, signals,  writings, images and sound or intelligence of any  nature by wire, visual or other electro-magnetic  emissions, Radio waves or Hertzian waves,  galvanic, electric or magnetic means.;

Explanation. \026 "Radio waves" or "Hertzian  waves" means electro magnetic waves of

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frequencies, lower than 3,000 giga-cycles per  sound propagated in space without artificial  guide."

  What is also important are the definitions of the words  ’message’ and ’telegraph line’  in the 1885 Act which read: "message" means any communication sent by  telegraph, or given to a telegraph officer to be sent  by telegraph or to be delivered.

"telegraph line" means a wire or wires used for  the purpose of a telegraph, with any casing,  coating, tube or pipe enclosing the same, and any  appliances and apparatus connected therewith  for the purpose of fixing or insulating the same.

 Section 4 of the 1885 Act gives exclusive privilege in  respect of telecommunication and the power to grant  licences to the Central Government.  Pursuant to such  power, licences have been granted to service providers.   According to the service providers in terms of their licence  no further transfer of the rights to use the telegraph could  be affected by them.  Therefore, what was provided was a  service by the utilization of the telegraph licenced to the  service providers for the benefit of the subscribers.  We will proceed on the basis that incorporeal rights  may be goods for the purposes of levying sales tax.   Assuming it to be so, the question is whether these electro  magnetic waves can fulfill the criteria laid down in Tata  Consultancy  for goods.  In our opinion the question must  be answered in the negative.  Electromagnetic waves have  been described in Telecommunications Law : David Gilles  & Roger Marshal: Butterworths:-

"1.14. Electromagnetic waves travel through free  space from one point to another but can be  channeled through waveguides which may be  metallic cables, optical fibres or even simple  tubes.  All electromagnetic waves are susceptible  to interference from one another and unrelated  electrical energy can distort or destroy the  information they carry.  To reduce these problems  they have been organized within the spectrum  into bands of frequencies or wavelengths for the  transmission of particular types of services and  information"

. The process of sending a signal is as follows:-

"Data is superimposed on a carrier current or  wave by means of a process called modulation.  Signal modulation can be done in either of two  main ways: analog  and digital.  In recent  years, digital modulation has been getting more  common, while analog modulation methods have  been used less and less.  There are still plenty of  analog signals around, however, and they will  probably never become totally extinct. Except for DC signals such as telegraph and  baseband, all signal carriers have a definable  frequency or frequencies. Signals also have a  property called wavelength, which is inversely

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proportional to the frequency".(Encyclopedia of  Technology Terms of  Techmedia)

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.          We cannot anticipate what  may be achieved by  scientific and technological advances in future. No one has  argued that at present electromagnetic waves are  abstractable or are capable of delivery.  It would, therefore,  appear that an electro-magnetic wave (or radio frequency as  contended by one of the counsel for the respondents), does  not fulfill the parameters applied by the Supreme Court in  Tata Consultancy for determining whether they are goods,  right to use of which would be a sale for the purpose of  Article 366(29-A)(d).  The learned Judges in State of U.P. V. Union of India  (supra) held that "telephone instruments and other  appliances including wiring, cable etc. are "undoubtedly  "goods" within the definition of the word in Section 2(d) of  the U.P. Act".  It was also held a telephone exchange being  housed in immovable properties would make no difference  because a tangible object like electricity which is generated  in projects and transmitted through sub-stations housed in  building has been held in CST V. M.P. Electricity Board  (1969) 1 SCC 200 and State of A.P. V. National Thermal  Power Corpn. Ltd. (2002) 5 SCC 203 to be goods.  Had the learned Judges limited their observations to  the telephone instruments we could have had no quarrel  with the opinion stated.  But they have in a subsequent  portion of their judgment clarified that there a telephone  connection along with all other accessories to the telephone  exchange with or without instruments are goods  within the  meaning of Section 2(d) of the U.P. Act.  The essence of the  ’goods’ therefore, according to the learned Judges, lay in the  entire system.  To arrive at this conclusion,  the reliance on  the two cited judgments was inapposite.  It was the sale and  purchase of electricity which was being considered in those  cases. The goods was the electrical energy.  What the  customers were being charged for was not the medium that  was being used to transfer the electricity, but the electrical  energy itself. In the case of telecommunications on the other  hand, if the decision in State of U.P. vs. Union of India  and the respondent’s submission are correct, the customers

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are not to be charged for what is being transferred through  the medium but the use of the medium itself.   Additionally  in the State of Andhra Pradesh V. National Thermal  Power Corporation (supra), the issue before the  Constitution Bench was not whether electricity was goods  for the purposes of sales tax but the situs of the sale of  electricity.   The learned Judges also in State of U.P. Vs. Union of  India drew support from the decision of the Supreme Court  of Wisconsin (USA) in McKinley Telephone Co. v.  Cumberland Telephone Co. 152 Wis 359: 140 NW 39:  1913 Wisc Lexis 77 which had held that the furnishing of  the telephone services might be classed as the supplying of  a commodity constituting a subject of commerce.   The decision in Mckinley Telephone,  even if it were  to be  held  of persuasive value, is not really relevant.  That  was a case where two competing telephone companies  contracted that one should confine its business to the city  and the other to rural lines out of the city. The rural  company had the option to buy the rural lines  of the other.   Two questions fell for consideration.  The first question was  whether the contract was specifically enforceable.  This  question was also answered in the affirmative.  The second  question was whether the contract was in violation of the  anti-trust laws.  This was answered in the affirmative.   It  was in that context that the Court opined that:  "It is obvious that the statute is directed against  contracts which are violative of the public policy  of the state respecting restraints of trade and  competition in the supply of any commodity in  general use constituting a subject of commerce.   The furnishing of telephone services may be  classed within the general terms of the statute as  the supplying of a commodity constituting a  subject of commerce."

Apart from the fact that the context was wholly  different, the question whether a telephone service was  "goods" or not was not really in issue.   Incidentally, the  decision in Mckinley Telephones has been distinguished  in several subsequent decisions of the United States.  [See  Fleetway, Inc. Vs. Public Service Interstate Transport Co. 72  F.2d 761 (1934). State Broadcasting Co. Vs. United Press  Intern. Inc. 369 F 2d 268 (1966), Columbia Broadcasting  System, Inc. V. Amana Refrigeration Inc. 295 F.2d 375  (1961)]         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 immoveable property as  contended by some of the petitioners. In the State of U.P. Vs. Union of India (supra) it was  also held:- "Handing over of possession is not sine qua non  of completing the transfer of the right to use any  goods,  as was held by a Constitution Bench of  this Court in 20th Century Finance Corpn. Ltd.  V. State of Maharashtra (2000) 6 SCC 12.    Once  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

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transfer of the right to use the goods".

With respect,  the decision in 20th Century  Finance  Corporation Limited Vs. State of Maharashtra, cannot be  cited as authority for the proposition that delivery of  possession of the goods is not a necessary concomitant for  completing a transaction of sale  for the purposes of Article  366 (29A) (d) of the Constitution.  In that decision the Court  had to determine where the taxable event for the purposes  of sales tax took place in the context of sub-clause (d) of  Article 366 (29A).  Some States had levied tax on the  transfer of the right to use goods on the location of goods at  the time of their use irrespective of the place where the  agreement for such transfer  of right to use such goods was  made. Other States levied tax upon delivery of the goods in  the State pursuant to agreements of transfer while some  other States levied tax on deemed sales on the premise that  the agreement for transfer of the right to use had been  executed within that State (vide paragraph 2 of the  judgment as reported).  This Court upheld the third view  namely merely that the transfer of the right to use took  place where the agreements were executed.  In these  circumstances the Court said that:-  "No authority of this Court has been shown on  behalf of respondents that there would be no  completed transfer of right to use goods unless the  goods are delivered. Thus, the delivery of goods  cannot constitute a basis for levy of tax on the  transfer of right to use any goods. We are,  therefore, of the view that where the goods are in  existence, the taxable event on the transfer of the  right to use goods occurs when a contract is  executed between the lessor and the lessee and  situs of sale of such a deemed sale would be the  place where the contract in respect thereof is  executed. Thus, where goods to be transferred are  available and a written contract, is executed  between the parties, it is at that point situs of  taxable event on the transfer of right to use goods  would occur and situs of sale of such a transaction  would be the place where the contract is executed.                                           (emphasis ours)

In determining the situs of the transfer of the right to  use the goods, the Court did not say that delivery of the  goods was inessential for the purposes of  completing the  transfer of the right to use.  The emphasized portions in the  quoted passage  evidences that the goods must be available  when the transfer of the right to use the goods take place.   The Court also recognized that for oral contracts the situs of  the transfer may be where the goods are delivered  (see para  26 of the judgment)   In our opinion, the essence of the  right under Article  366 (29A) (d) is that it relates to user of goods. It may be  that the actual delivery of the goods  is not necessary for  effecting the transfer of the right to use the goods but the  goods must be available at the time of transfer must be  deliverable and delivered at some stage.  It is assumed, at  the time of execution of any agreement to transfer the right  to use, that the goods are available and deliverable. If the  goods, or what is claimed to be goods by the respondents,  are not deliverable at all by the service providers to the  subscribers, the question of the right to use those goods,  would not arise. In State of of Andhra Pradesh and Anr. Vs. Rastriya

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Ispat Nigam Ltd. (2003) 3 SCC 214, it was claimed by the  Sales Tax Authorities that the transaction by which the  owner of certain machinery had made them available to the  contractors was a sale.  The Court rejected the submission  saying that:- "\005the transaction did not involve transfer of right  to use the machinery in favour of contractors\005.  The effective control of the machinery even while  the machinery was in use of the contractor was  that of the respondent Company; the contractor  was not free to make use of the machinery for the  works other than the project work of the  respondent or \005.(para 4 page 315)

But in the case of Agrawal Brothers Vs. State of  Haryana and Anr. (1999) 9 SCC 182  when the assessee  had hired shuttering to favour of contractors to use it in the  course of construction of buildings it was found that  possession of the shuttering materials was transferred by  the assessee to the customers for their use and therefore,  there was a deemed sale within the meaning of sub-clause  (d) of Clause 29-A of Article 366. What is noteworthy is that  in both the cases there were goods in existence which were  delivered to the contractors for their use.  In one case there  was no intention to transfer the right to use while in the  other there was.  But if there are no deliverable goods in existence as in  this case, there is no transfer of user at all.  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. Therefore whether goods are incorporeal or corporeal,  tangible or intangible, they must be deliverable.  To the  extent that the decision in State of U.P. Vs. Union of India   held otherwise, it was, in our humble opinion erroneous. It has been held in Builders Association of India Vs.  Union of India (1989) 2 SCC 645 that the clauses in  Article 366 (29A) do not amount to a separate entry in List  II of the 7th Schedule to the Constitution enabling the States  to levy tax on sales and purchase independent of Entry 54  thereof.(see also Larsen & Toubro Ltd. Vs. Union of India  (1993) 1 SCC 365, 383).  Article 366 (29A) as introduced  by the 46th Amendment not being equivalent to a separate  entry in List II is subject to the same limitations as Entry 54  of that List. At the time of amending Article 366, Article 286  was also amended by the introduction of clause (3) which  reads as:-  "(3) Any law of a State shall, in so far as it  imposes, or authorizes the imposition of:-

(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

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restrictions and conditions in regard to the  system of levy, rates and other incidents of  the tax as Parliament may by law specify."

         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  turn our attention to the latter.   In 1994, service tax was introduced by Parliament  under Chapter V of the Finance Act, 1994 with 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 with effect from the coming into force  of the 1994 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  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 149(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 (1) of Section 3 of the Indian Telegraph 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 (104) 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 II 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 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

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opinion  remain to be taxed under the State Sales Tax Laws.  We have given the reasons 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 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 on which service tax was being paid and could not  be included within the purview of the sale.  The Kerala High  Court also dealt with the case of 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 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 States. In  determining the issue, however  the Assessing Authorities  will have to keep in mind the following principles:  If the  SIM 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  decision.  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 service in the value of the SIM card  by relying on the aspects doctrine.  That doctrine merely  deals with legislative competence. As has been succinctly  stated in Federation of Hotel & Restaurant Association  of India Vs. 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 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 assessed to  Sales Tax.  As was said in Larsen & Toubro Vs. Union of

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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 same reason the Centre cannot include the  value of the SIM cards, if they are found ultimately to be  goods, in the cost of the service. As was held by us in  Gujarat Ambuja Cements Ltd. Vs. Union of India (2005)  4 SCC 214,228. "This mutual exclusivity which has been  reflected in Article 246(1) means that  taxing entries must be construed so as to  maintain exclusivity.  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 in 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."

We will therefore have to allow the appeals filed by  BPL in Civil Appeal Nos. 3329-30 of 2002 and Escotel 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. 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: 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

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sale of goods or the price of goods in the value  of the service.  

      The writ petitions and appeals are disposed of  accordingly.  No order as to costs.                               IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.1404 OF 2006 (Arising out of SLP(C) No. 6301 of 2004)

Asstt. Commissioner, Trade Tax & Ors.   \005.Appellants Versus General Manager, B.S.N.L.                       \005.Respondent

WITH CA Nos.1403/06,1405/06,1406/06,1407/06,1408-1418/2006, CA.No.1420/06,1421/06,1422-1424/06,1425/06  @ SLP Nos.5447/2003 15442-44/05,  15451-62/05,15464/05,17281/05,17286-88/05,22569/05  With Contempt Petn.No.365/04 in WP(C) No.183/03,

O R D E R

Ruma Pal , Dr. AR Lakshmanan & Dalveer Bhandari

        Leave granted in the special leave petitions.

       Civil Appeals are disposed of in terms of the judgment  delivered by us today in W.P. (C) No. 183/2003 etc. etc.  titled \026 Bharat Sanchar Nigam Ltd. & Anr. v. Union of  India & Ors. Contempt Petn.No.365/04 in WP(C) No.183/03,

         Contempt petition is dismissed.