BSNL vs Union of India

FACTS

BACKGROUND OF THE CASE

  1. In the present matter, Bharat Sanchar Nigam Limited (BSNL) appealed to the Supreme Court of India and filed a writ petition provided under Article 32 of the Constitution of India, challenging the fidelity of the judgement of the High Court.
  2. BSNL was the writ petitioner in the Escotel Mobile Communications Limited v Union of India[1] The issue was regarding the nature of transactions for which cell phone connections are used. The question was whether it is a service or a sale or both.

PAST JUDGEMENTS OF THE COURTS

  1. The High Courts of Punjab, Haryana, Andhra Pradesh and Allahabad held that it was not a sale of good in nature explaining that the demand of the State Sales Tax on rents charged by the telecom service provided to their subscribers. However, in the case, the State of U.P. v Union of India[2], the Apex court overruled the judgment of the High Courts.
  2. The Kerala High Court in its judgement held that selling and activation process of SIM cards are sales and services both wherein the transaction of sale of a SIM card included its activation forming a part under the State Sales Tax and Taxable service as well defined in Section 65(72)(b) of the Finance Act, 1994.

THE CASE AHEAD

  1. Section 11 of the Civil Procedure Code, 1908 defines Res Judicata which is the basis of this case that examines whether the telecom services can be termed as a sale or service or both while discussing the scope of Section 11 of the CPC.

 

ISSUES

  1. Whether transactions related to telecommunication services and products fall within the ambit of goods?
  2. Whether the Apex Court has correctly analysed the scope of Article 366 (29A) in the present case?
  3. Whether levying sales tax on telecom services is justifiable according to the law?
  4. Whether the “aspect theory” is applicable to transactions concerning telecom enable the State to impose sales tax on the same transactions wherein the Central Government imposes service tax?
  5. Whether tax cases fall under Res Judicata under Section 11 of the Civil Procedure Code, 1908?

 

ANALYSIS

 

ISSUE 1: Whether transactions related to telecommunication services and products fall within the ambit of goods?

Article 366(12) of the Constitution of India, 1949 defines “goods” that includes all commodities, articles and materials. The meaning of goods with reference to tax given with the introduction of Article 366(29A) was not changed as defined under Article 366(12) of the Indian Constitution.

In Gannon Dunkerley case[3], the Supreme Court held that for a transaction to come under taxation, transfer or delivery of property in goods from one party to the contract to the other must be fulfilled. However, in the present case, the electromagnetic waves used for telecom services are not abstracted and consumed and thus, not extinguished by the subscribers of such telecom services. Such services are merely the medium to communicate which are not stored, processed, marketed or even delivered. The subscriber is not in possession of the electromagnetic waves by a mere access to telecom services or phone connection.

The transaction related to telecommunication services and products or the electromagnetic waves are not transmitted but the signals generated by the subscribers that carry some messages are transmitted through such waves. No part of the wave is transferred or delivered. Moreover, a subscriber is not reasonably intended to purchase or obtain any right to use the electromagnetic waves with the telecom connection.

Therefore, the Court was of the view that such electromagnetic waves or transaction related to telecommunication services and products does not fall within the ambit of goods.

 

ISSUE 2: Whether the Apex Court has correctly analysed the scope of Article 366 (29A) in the present case?

On the recommendation of the Law Commission the 46th Amendment to the Constitution of India in 1981 paved way for the Government to hold an individual or entity liable for Composite contracts of sale and service to be taxed under Article 366 (29A).

Therefore, meals served at restaurants were liable to be taxed as before it was difficult to identify the value of goods or inputs along with the contract to provide for labour wherein only the latter was considered a sale. However, if it only constituted one part of the whole transaction then it was not considered a sale.

The Parliament or the Central Government holds exclusive jurisdiction for providing the cellular services for telecommunication services to the subscribers of telecom providers, commencing the analysis of Article 366 (29A) of the Constitution of India, 1949. Thus, on analysing the scope of the said Article, the Court assumed the nature of telecom services and products as a composite contract of sale and service both to resolve further issues.

 

ISSUE 3: Whether levying sales tax on telecom services is justifiable according to the law?

Levying Sales Tax on sales is under the legislative competence of the States, if the essentials accompanying the sale are existing in the particular transaction and the sale is apparently visible in the transaction. However, this does not give a free hand to the States to establish upon the Union List (Article 245) and tax services by including the cost of such service in the value of the goods. Even under composite contracts of sales and services which are divisible under Article 366 (29A), the value of goods involved in the execution of the final or whole transaction should not be subjected to Sales Tax.

Therefore, in the view of the foregoing, the Supreme Court concluded that the nature of transactions related to telecommunications may be a composite contract of sales and services in nature. And it is under the jurisdiction of the State Government to tax the sale element, providing telecom services by the service providers, if there is visible sale and only to the extent relatable to such sale.

 

ISSUE 4: Whether the “aspect theory” is applicable to transactions concerning telecom enable the State to impose sales tax on the same transactions wherein the Central Government imposes service tax?

The Federation of Hotel & Restaurant Association of India v Union of India[4] case explained the aspect theory wherein subjects in one aspect and for one purpose that fall within the power of a particular legislature may for different aspect and for different purpose fall within a different legislative power although they may be overlapping but the overlapping must be legally binding.

In the present case, the Court came to a conclusion that overlapping of taxes under on the Central part and the State part does not minimize the distinctiveness of the aspects. However, on a transaction the State cannot tax the service along with goods and violate on the jurisdiction of the Central part as well as the Center cannot include the value of SIM cards in the cost of service when found ultimately to be goods.

 

ISSUE 5: Whether tax cases fall under Res Judicata under Section 11 of the Civil Procedure Code, 1908?

The Apex Court in the matter, State of Uttar Pradesh v Union of India and Anr[5], held that telecommunication devices and other such related devices concerning telecom services are goods and the transfer of the right to use such services falls under the scope of sale. And a question of the validity of this judgement concerning the same would occur only if the Court dismisses the criticism of the appellant version because the Court is exempted from opening those issues again based on the principle of Section 11 of CPC, 1908.

The decision of the Court in this matter would have a binding effect[6] not only on the parties to the case but also to all the Courts in India because the case relates to a subsequent period wherein a direct decision of the Court on a legal point of view does not act as Res Judicata in a dispute for a subsequent year. Thus, the applicability of the Res Judicata to the present case between BSNL and Union of India would be a matter of academic essence.

Res Judicata under Section 11 of CPC, 1908 does not extend to tax proceedings. The rationale behind it is that the assessment year is determined in one year may not apply in the subsequent/following year. However, it cannot change the position in subsequent years until and unless there are any material changes directing the amount to take a different prospect in the matter.

 

CONCLUSION

In the present matter of BSNL v Union of India, the Supreme Court of India held that the nature of transactions used by the telecommunication services, being not finished off by the telecom subscribers, can neither be consumed nor be abstracted. They are just a medium of communication transmitting signals generated by the subscribers themselves which are not delivered, possessed or stored and marketed.

In telecommunications, a message is transmitted by the means of the telegraph which itself is deliverable or transferable. However, the transaction concerning telecommunication services may be a composite contract of sale and service. The access to such services to the subscribers does not mean that the subscriber is in the possession of such electromagnetic waves. It is possible to tax the sale part of it for the State provided that there is a visible sale and only to the extent relatable to such sale to the telecom’s subscriber.

Without understanding the variation and incorrect application of the aspect theory, the resultant damage from transactions concerning hire-purchase and transfer of right to use have been brought under the service tax. In such transactions, the incidence of service tax is only on the service element and not on the entire value of the contract. It was also concluded by the Court that overlapping of taxes in different aspects cannot minimize or take away the distinctiveness of the aspects. Thus, in such cases, the same transaction can involve two or more taxable events.

The Court held that Article 366 29(A) of the Constitution of India, 1949 only covers transfers of exclusive and permanent nature. It does not include transfers of divisible interests which are non-exclusive and temporary in nature to be taxed as services.

Res Judicata under Section 11 of the Civil Procedure Code of 1908, does not relate to matters involving taxation for several assessment years. The rationale behind this is as it does not refer to exclude Court issues concerning the same cause of action while there is a well-defined cause of action for each assessment year. The legal framework of our country allows that it is open to a higher Court of jurisdiction or jurisdiction in which a lower power bench decision is cited as an authority to overrule it which does not modify the conclusive nature of a judgement on the parties to the earlier list wherein the principle of Res Judicata would exist to apply.

 

REFERENCES 

[1] Escotel Mobile Communications Limited v Union of India, 1998 (45) DRJ 394

[2] State of U.P. v Union of India, (2003) 3 SCC 239

[3] Gannon Dunkerley & Co. Ltd. v The State of Madras, AIR 1954 Mad 1130

[4] Federation of Hotel & Restaurant Association of India v Union of India, (1989) 3SCC 634

[5] State of Uttar Pradesh v Union of India and Anr, 2003 (1) SCR 785

[6] Article 141, Constitution of India, 1949

Author: Aditya Gupta,
Symbiosis Law School, Pune , 2nd Year, Student

Leave a Comment