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

- **Citation:** [2006] 2 S.C.R. 823
- **Court:** Supreme Court of India
- **Decided:** 2006-03-02
- **Bench:** Ruma Pal, Dr. Ar. Lakshmanan, Dalveer Bhandari
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/bharat-sanchar-nigam-ltd-and-anr-v-union-of-india-and-ors-21291
- **Pages:** 50

## Headnote

Constitution of India 1950-Articles 286, 366, (12) and (29A) and
Schedule VII, List I Entry 92-C and List II Entry 54-Sale of Goods Act,
A
B
1930-Sections 2(7) and 4-Telegraph Act, 1885-Section 4.
C
Telephone Services-Sale Tax, Levy of by States-Nature of
Transaction-Whether constitute sale of goods or service contract or a
composite contract of service and sale-Meaning and scope of 'Goods' in
telecommunication-Service providers are licensees under the Telegraph Act
and provide telephone services to the subscribers-They filed writ petitions D
challenging imposition of sales tax by states on telephone services alleging
that there is no sale of goods involved-States claim that transaction involve
transfer of right to use goods and is a deemed sale under Articles 366
(29A)(d)-Allowing the petitions, held, a telephone service is nothing but a
service-electromagnetic waves or radio frequency involved in E
telecommunication are not goods for the purpose of Article 366(29A)(d)-
Goods in telecommunication are limited to the handsets supplied by the service
provider-There may be transfer of right to use the goods by giving a telephone
connection-Nature of 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 F
to the extent relatable to such sale-The aspect theory would not apply to
enable the value of the services to be included in the sale of goods or the price
of goods in the value of service-Question whether SIM Card is 'goods' is left
to be determined by the hsessing Authority.
Sale of Goods-Deemed Sale-Levy of Sales Tax-Composite sale-service
--;
contracts divisible by Article 366(29A)-Scope of-Held, there are only three
composite service-sale transactions named under clauses (b) (c) and (/) of
Article 366(29A) where splitting of sale and service is specifically permitted
and sale element can be isolated and subjected to sales tax-Apart from these,
G
823
H
824
SUPREME COURT REPORTS
[2006) 2 S.C.R.
A there is no other service which has been permitted to be so split, unless it
satisfies the dominant intention test.
Sale of Goods-'Sale and Goods '--Deemed Sale-Meaning and ScopeEffect of insertion of Article 366(29A) by the 46th Amendment-Held,
transactions which are deemed sales are limited to various sub-clauses of
B Article 366(29AJ-Al/ other transactions would have to qualijj; as 'sales' for
the purposes of levy of sales tax-Article 366(29A) did not alter meaning of
the word 'goods '-What are 'goods' in a sale transaction is a matter of
contract and intention of the parties.
Telecommunication Services--Nature of-Service, Sale or of sale and
C service-Levy of sales tax and service tax·-Dominant intention testApplication of Article 366(29A)(d)-Held, a transaction for providing telephone
services is not covered by Article 366(29A)(d) as there is no transfer of right
to use goods by the service provider to the subscriber-Reasons, object and
scope of introduction of clauses (a) tot (f) to Article 366(29A) by the 46th
D Amendment discussed-Nature of transaction involved in providing a telephone
connection may be a composite contract of sen·ice and sale--Sales tax can be
imposed on such transaction if it in truth represents two distinct and separate
contracts and is discernible-Dominant nature test applicable to all transactions
not specifically covered under Article 366(29AJ(A) to (/).
E
Telecommunication Services---Levy of Sales Tax by State-"Goods',
Meaning and scope of-What constitute 'goods ' in telecommunication for the
purpose of imposition of sales tax--Held, 'goods' for the purpose of sales tax
may be tangible or intangible provided it has the three attributes specified in
Tata Consultancy case i.e. (i) its utility, (ii) capable of being bought and sold
F and (iii) capable of being transmitted, transferred, delivered, stored and
possessed-Goods must be deliverable-The electroma

## Text

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·~·.
BHARAT SANCHAR NIGAM LTD. AND ANR.
v.
UNION OF INDIA AND ORS.
MARCH 2, 2006
[RUMA PAL, DR. AR. LAKSHMANAN AND
DALVEER BHANDARI, JJ.)
Constitution of India 1950-Articles 286, 366, (12) and (29A) and
Schedule VII, List I Entry 92-C and List II Entry 54-Sale of Goods Act,
A
B
1930-Sections 2(7) and 4-Telegraph Act, 1885-Section 4.
C
Telephone Services-Sale Tax, Levy of by States-Nature of
Transaction-Whether constitute sale of goods or service contract or a
composite contract of service and sale-Meaning and scope of 'Goods' in
telecommunication-Service providers are licensees under the Telegraph Act
and provide telephone services to the subscribers-They filed writ petitions D
challenging imposition of sales tax by states on telephone services alleging
that there is no sale of goods involved-States claim that transaction involve
transfer of right to use goods and is a deemed sale under Articles 366
(29A)(d)-Allowing the petitions, held, a telephone service is nothing but a
service-electromagnetic waves or radio frequency involved in E
telecommunication are not goods for the purpose of Article 366(29A)(d)-
Goods in telecommunication are limited to the handsets supplied by the service
provider-There may be transfer of right to use the goods by giving a telephone
connection-Nature of 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 F
to the extent relatable to such sale-The aspect theory would not apply to
enable the value of the services to be included in the sale of goods or the price
of goods in the value of service-Question whether SIM Card is 'goods' is left
to be determined by the hsessing Authority.
Sale of Goods-Deemed Sale-Levy of Sales Tax-Composite sale-service
--;
contracts divisible by Article 366(29A)-Scope of-Held, there are only three
composite service-sale transactions named under clauses (b) (c) and (/) of
Article 366(29A) where splitting of sale and service is specifically permitted
and sale element can be isolated and subjected to sales tax-Apart from these,
G
823
H
824
SUPREME COURT REPORTS
[2006) 2 S.C.R.
A there is no other service which has been permitted to be so split, unless it
satisfies the dominant intention test.
Sale of Goods-'Sale and Goods '--Deemed Sale-Meaning and ScopeEffect of insertion of Article 366(29A) by the 46th Amendment-Held,
transactions which are deemed sales are limited to various sub-clauses of
B Article 366(29AJ-Al/ other transactions would have to qualijj; as 'sales' for
the purposes of levy of sales tax-Article 366(29A) did not alter meaning of
the word 'goods '-What are 'goods' in a sale transaction is a matter of
contract and intention of the parties.
Telecommunication Services--Nature of-Service, Sale or of sale and
C service-Levy of sales tax and service tax·-Dominant intention testApplication of Article 366(29A)(d)-Held, a transaction for providing telephone
services is not covered by Article 366(29A)(d) as there is no transfer of right
to use goods by the service provider to the subscriber-Reasons, object and
scope of introduction of clauses (a) tot (f) to Article 366(29A) by the 46th
D Amendment discussed-Nature of transaction involved in providing a telephone
connection may be a composite contract of sen·ice and sale--Sales tax can be
imposed on such transaction if it in truth represents two distinct and separate
contracts and is discernible-Dominant nature test applicable to all transactions
not specifically covered under Article 366(29AJ(A) to (/).
E
Telecommunication Services---Levy of Sales Tax by State-"Goods',
Meaning and scope of-What constitute 'goods ' in telecommunication for the
purpose of imposition of sales tax--Held, 'goods' for the purpose of sales tax
may be tangible or intangible provided it has the three attributes specified in
Tata Consultancy case i.e. (i) its utility, (ii) capable of being bought and sold
F and (iii) capable of being transmitted, transferred, delivered, stored and
possessed-Goods must be deliverable-The electromagnetic waves or radio
frequency do not faljil/ these attributes and are not goods for the purpose of
Article 366(29A)(d)--Question whether the telephone system including the
telephone exchange was goods or immovable property not determinedQuestion whether SIM cards supplied by service providers are 'goods' and
G liable to sales tax left to be determined by assessing authority-Dominant
intention test to be applied.
Telecommunication Service-Composite Contract of Sale and serviceLevy of sales tax or service tax-Valuation of-Aspect theory-Scope and
application-Held, aspect theory deals with legislative competence of Centre
H and States-It does not allow State to entrench upon the Union List and tax
BHARAT SAN CHAR NIGAM LTD. v. U.0.1.
825
~~
services by including the cost of service in the value of the goods-Similarly A
Centre cannot include the value of goods in the cost of the service.-Res
judicata-Constitution of India-Articles 32, 226-Doctrine of res judicata
whether applicable to writ petitions-Held, yes.
Civil Procedure Code, 1908, Section I I-Constitution of India, Article
141-Doctrine of Res judicata-lnapplicability in tax cases to assessment B
orders for subsequent years as each assessment year furnishes a fresh cause
of action-However, earlier pronouncement has precedent value and where
,;
facts and law in a subsequent assessment year are the same, no authority can
generally be permitted to take a different view-A court of superior strength
or jurisdiction can overrule or reverse the earlier decision.
c
Article 32, 226, 14, 19(J)(g)-Writ petition raising question as to
legislative competence of states to levy sales tax on telecommunication
services-Held, is maintainable as this question can not be raised or decided
by the assessing authority-If state is incompetent to levy such tax, it would
l.
result in violation of Articles 14 and /9(J)(g).
D
The principal issue that arose in this batch of cases 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 E
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, whether
both legislative authorities could levy their separate tax<)s together or only
one of them. It is the case of the service providers that there is no sale F
transaction involved and that the attempt of the several States to levy tax
i
on the provision of mobile phone facilities by them to subscribers was
constitutionally incompetent. It is their case that the transaction in~uestion
was merely a service and that the Union Government alone was competent
to levy tax thereon. The States' contention is that the transaction was a
deemed sale under Articl~ 366 (29A)(d) of the Constitution read with the G
charging sections in their various sales tax enactments and therefore they
,
~
are competent to levy sales tax on the transactions.
Disposing of the matter, the Court
-;(-
HELD: 1. A telephone service is nothing but a service. There is no H
826
SUPREME COURT REPORTS
(2006] 2 S.C.R.
A sales element apart from the obvious one relating to the handset if any.
That and any other accessory supplied by the service provider remain to
be taxed under the States Sales Tax Laws. (862-G)
2. Of all the different kinds of composite transactions the drafters
of the 46th Amendment chose three specific situations, a works contract,
B 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)
to (I) of clause 29A of Article 366, there is no other service which has been
C permitted to be so split. 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 purpos,es of levy of sales tax. To this extent only
is the principle enunciated in Gannon Dunkerley limited. The amendment
especially allows specific composite contracts viz. works contracts (clause
D (b)); hire purchase contracts (clause (c)), catering contracts (clause (I))
by legal fiction to be divisible contracts where the sale element could be
isolated and be subjected to sales tax. (850-G-H; 850-B-C; 851-A)
E
State of Madras v. Gannon Dunkerley & Co., IX STC 353 (SC),
referred to.
State of Punjab v. Associated Hotels of India ltd., (1972( l SCC 472
and A. V. Meiyappan v. Commissioner of Commercial Taxes, (1967) XX STC
115, held legislatively overruled.
3. If there is an instrument of contract which may be composite in form
F 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 imposing tax on
the sale. The test therefore for composite contracts other than those
G 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'. The Court will, for the want of
a better phrase, call this the dominant nature test. After the 46th Amendment,
H the sale element of those contracts which are covered by the six sub-clauses
BHARAT SAN CHAR NIGAM LTD. v. U.0.1.
827
,, of clause (29A) of Article 366 are separable and may be subjected to sales A
tax by the States under Entry 54 of List II and there is no question of the
dominant nature test applying. [851-C-F; 852-F-G)
Rainbow Colour Lab v. State of M.P., [2000) 2 SCC 385 and C.K.
Jidheesh v. Union of India, (2005) 8 SCALE 784, dissented from.
Associated Cement Company Ltd. v. Commissioner of Customs, [2001)
4 sec 593, followed.
B
J
4.1. What are the "goods" in a sale transaction, therefore, remains
r
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. C
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. (852-H; 853-A)
D
4.2. Article 366 (12) has defined the words "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 E
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". (853-B-C]
4.3. In Tata Consultancy Services v. State of Andhra Pradesh for the
purposes of levy of sales tax, it was held that "goods" may be a tangible
property or an intangible one. It would become goods provided it has the F
attributes therefore having regard to (a) its utility; (b) capable of being
bought and sold; and (c) capable of being transmitted, transferred,
delivered, stored and possessed." This is the correct approach to the
question as to what are "goods" for the purposes of sales tax. [854-D-Fl
Anraj v. Government of Tamil Nadu, (1986) 1 SCC 414; Vikas Sales G
Corporation v. Commissioner of Commercial Tax, (1996) 4 SCC 733 and
Sunrise Associates v. Government of NCT of New Delhi, (2000) IO SCC 420,
referred to.
Associated Cement Company Ltd. v. Commissioner of Customs, (20011 H
828
SUPREME COURT REPORTS
(2006] 2 S.C.R.
A 4 SCC 593 and Tata Consultancy Services v. State of Andhra Pradesh, [20051
j,
1 sec 308, followed.
5.1. 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
B 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. (856-D-Ef
c
David Gilles and Roger Marshal, Telecommunication Law; Referred
to.
5.2. A subscriber to a telephorne service could not reasonably be taken
to have intended to purchase or obtain any right to use electromagnetic
D waves or radio frequencies when a telephone connection is given. Nor does
i
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,
E incorporeal or corporeal, is given to him or her with the telephone
connection. It would, therefore, appear that an electro-magnetic wave {or
radio frequency), does not fulfill the parameters applied by the Supreme
Court in Tata Consultancy for ddermining whether they are goods, right
to use of which would be a sale for the purpose of Article 366{29A) {d).
F Hence, the electromagnetic waves are not 'goods' within the meaning of
the word either in Article 366(12) or in the State Legislations. lt is not in
the circumstances necessary for us to determine whether the telephone
exchange was not goods but immovable property as contended by some
of the petitioners. (856-F-G; 856-H; 857-A; 858-E-F]
G
State of U.P. v. Union of India, (2003] 3 sec 239, overruled.
CST v. M.P. Electricity Board, [1969] l SCC 200 and State of A.P. v.
NTPC. ]2002] 5 SCC 203 and Mckinley Telephone Co. v. Comber/and
Telephone Co., 152 Wis 359, distinguished.
H
5.3. The essence of the right under Article 366 (29A) (d) is that it
.....
SHARA TSAN CHAR NIGAM LTD v. U.0.1.
829
relates to user of goods. It may be that the actual delivery of the goods is not A .1 ..
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 tlJe respondents, are not deliverable at all by
the service providers to the subscribers, the question of the right to use those B
goods, would not arise. 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. Of course the toll payer will use the road or bridge in one
sense. But the distinction with a sale of good is that the user would be of the C
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
i~corporeal or corporeal, tangible or intangible, they must be deliverable.
[860-B-C; G-H; 861-A-B)
20th Century Finance Corp. Ltd. v. State of Maharashtra, [2000] 6 SCC
12, explained.
State of A.P. v. Rashtriya Jspat Nigam Ltd., (2003] 3 SCC 214 and
Aggarwal Bros. v. State of Haryana, [1999] 9 SCC 182, referred to.
5.4. It is not possible for this Court to opine finally on the issue
whether SIM card is "goods". 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
D
E
in mind the following principles : if the SIM card is not sold by the assessee F
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 this Court can reach a decision. G
However 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. The High
Court in Escotel case, ought not to have finally determined the issue. In
any event, the High Court erred in including the cost of the service in the
•' <
H
830
SUPREME COURT REPORTS
[2006 j 2 S.C.R.
A value of the SIM card by relying on the aspects doctrine which merely deals
.s; .
with legislative competence. (863-D-G(
Escatel Mobile Communication v. Union of India, (2002( 126 STC 475
(Ker), dissented and overruled.
B
Federation of Hotel and Restaurant Association of India v. Union of
India, (1989( 3 SCC 634, referred to.
6. Article 366 (29A) is 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
c was also amended by the introduction of clause (3). Therefore the deemed
sales included in Entry 54 List II would also be subject to the limitations
of Article 286, Article 366(29A). (861-C-D; Fl
Builder Association of India v. Union of India, ( 19891 2 SCC 645 and
D
Larsen and Toubro Ltd v. Union of India, (1993( 1 SCC 365, referred to.
7. In I 994, 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.
E Several different services were included in the definition. Section 65(16)(b)
included service 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. Finally in 2003, List I of the Seventh Schedule to the
Constitution was amended by including taxes on service under Entry 92C. By
this time there were about 100 taxable services including the service of a
F telephone connection. The question to be considered is whether the sale
element in each of the several services and in particular the service of a
telephone connection taxable by the States. (861-H; 862-A; 862-E-FJ
8. 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
G 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.
1'-
Even in those composite contracts which are by legal fiction deemed to
the divisible under Article 366(29A), the value of the goods involved in the
execution of the whole transaction cannot be assessed to Sales Tax. For the
H
~
..
-i
BHARAT SANCHAR NIGAM LTD v. U.0.1.
831
same reason the Centre cannot include the value of the SIM cards, if they are A
found ultimately to be goods, in the cost of the service. (864-A, B; DJ
Gujarat Ambuja Cement v. Union of India, [2005) 4 SCC 214 and
Larsen and Toubro Ltd. v. Union of India, [1993) I SCC 365, followed.
9. 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 bench of superior jurisdiction.
[839-H; 840-A-C)
Amalgamated Coalfields Ltd v. Janapada Sabha, (19631 Supp. I SCR
172; Radhasoami Satsang v. Commissioner of Income Tax, [1992) 1 SCC 659
and Junior Telecom Officers Forum v. Union of India, (1993) Supp. 4 SCC
693, relied on.
Devi Lal Modi v. Sales Tax Officer, (1965) 1 SCR 86 and Rupa Ashok
Hurra v. Ashok Hurra, (2002) 4 SCC 388, distinguished.
Amalgamated Coalfields Ltd v. Janapada Sabha, [1962) 1 SCR 10,
referred to.
10. 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
B
c
D
E
F
G
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 H · ···
832
SUPREME COURT REPORTS
[2006) 2 S.C.R.
A 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. v. 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 11 Iarger
bench. This bench being of superior strength, can, declare that the earlier
B decision does not represent the law. None of the decisions cited by the State
of U.P. are authorities for the proposition that this court cannot, in the
circumstances of this case, do so. This preliminary objection of the State of
U.P. is therefore rejected. [840-F-H; 841-AI
C
11. 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 an~ 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
D restriction upon the right of the service providers to carry on trade under
Article 19(l)(g). (846-B-Cl
E
F
Bengal Immunity Company v. State of Bihar, (1955( 2 SCR 603 and
Himmatlal Harilal ,\,/ehta v. State of Madras, ( 19541 SCR 1122, followed.
CIVIL ORIGINAL JURISDICTION : Writ Petition (Civil) No. 183 of
2003.
(Under Article 32 of the Constitution of India.)
WITH
C.A. Nos. 2408/2002, 3329-3330/02, WP (C) Nos. 227, 223, 372, 450/
03, 468/05, C.A. Nos. 5337-5338/01, 4278-4288/02, W.P. (C) No. 144-45/
04, 149/04, 162/05, C.A. Nos. 6323-25/99, 2517-2518/04, 3086/04, 2471105.
G
G.E. Vahanvati, SGl (N.P.), P.P. Malhotra, ASG (N.P.), Sarup Singh,
Sr. Addi. Adv. Genl., Punjab, Aruneshwar Gupta, Addi. Adv. Genl., Rajasthan,
J.S. Attri, Addi. Adv. Genl., Himachal Pradesh, Ms. Pinky Anand, Sr. Standing
Counsel, Jharkhand, Harish N. Salve, K. Parasaran, C.S. Vaidyanathan, Parag
P. Tripathi, Dushyant A. Dave, A.M. Singhvi, Rajiv Dutta, Ashok H. Desai,
H Sunil Gupta, T.R. Andhyarujina, A.K. Ganguli, Rakesh Dwivedi, T.L.V. Iyer, S.
•
BHARAT SAN CHAR NIGAM LTD v. U.O.I. [RUMA PAL, J.]
833
-
Balakrishnan, V.A. Bobde, S.K. Dubey, A.K. Panda, S. Ganesh; Maninder A
Singh, Ms. Pratibha M. Singh, S. Fernandes, Tejveer Bhatia, Y. Handoo, Ms.
Aprajita Singh, Ms. Meenakshi Grover, Ankur Talwar, Saurabh Misra, Bishwajit
Singh (for B.S.N.L.), V.K. Rao, Ms. Madhu Sikri, Ravi Sikri, Punit Dutt Tyagi,
Mukesh Venna, Ajay Choudhary, Ajay Bansal, Praveen Kr. Singh, Bharat
Singh, V. Lakshmikumaran, Alok Yadav, Rajesh Kumar, Ms. Ritu Bhalla, K.S.
Nagra (for Mis. Suresh A Shroff & Co.), V. Balaji, Ms. R. Meena Kumari, B
Anurdh Sharma, K.R. Sasiprabhu, N. Venkataramani, M. Saffique, S.
Nandakumar, Dalip Kapoor, M. Bajpai, Ms. Rakhi Ray, Ms. Bina Gupta, Guntur
Prabhakar, Ajay Siwach, T.V. George, Arun K. Sinha, Bimal Roy Jad, K.K.
Mani, N. Prasad, K.B. Sandeep, Ms. Vimla Sinha, Pradeep Misra, K. Gulati,
Kamlendra Mishra, R.K. Dubey, R. Singh, Jatinder Kumar Bhatia, S. Wasim A. C
Qadri, R. Singh, V.K. Venna, P.Parmeswaran, Vivek Vishnoi, Prantap Kalra, Ms.
Neha, Parthiv, Ravi P. Mehrotra, Garvesh Kabra, Manoj Kumar Mishra, Ms.
Kiran Bhardwaj, K. Batra, H.C. Bhatia, Mrs. Anil Katiyar, Ms. Kirti Renu
Mishra, Dayan Krishnan, Gautam Narayan, Avijit Bhattacharjee, Tara Chandra
Shanna, Ms. Neelam Shanna, Ramesh Babu M.R., S. Prasad, R.S. Srivatsa, P.N.
Ramalingam (N.P.), Gopal Singh, R. Biswas, Ashok Mathur, B.B. Singh, Kumar D
Rajesh Singh, M_s. Kamini Jaiswal, Sushi! Kumar Jain, Mrs. D. Bharati Reddy,
P. Vinay Kumar; Ms. Sneha Bhaskaran, Sanjay R. Hegde, Anil K. Mishra, A.
Rohan Singh, Ranjan Mukherjee, G. Prabhakar, U. Hazarika, Satya Mitra, Ms.
Sumita Hazarika, Naveen Kumar, V.G. Pragasam, V.K. Sidharthan, Riku Sanna
(for M/s. Corporate Law Group), Ms. Vibha Datta Makhija, Chandra Mohan E
Anisetty, D.S. Mahara, Sanjeev K. Pabbi, Ms. Shikha Roy, S.K. Sabharwal,
Anil Shrivastava, S. Shrivastava, Ms. Kavita Wadia, Ms. Shivani Thakur, Ms.
Kiran Suri, Sanjay Jain, V.N. Raghupathy, Ravindra K. Adsure, Mukesh K. Giri,
Ms. Hemtika Wahi, Ms. Sadhana Sandhu, D.N. Goburdhan, Rajesh Pathak,
K.H. Nobin Singh, Rajeev Dwivedi, Manoj Saxena, Amit Meharia, Mohan
Prasad Meharia, A. Mariarputham, Ms. Aruna Mathur, Ms. Supama Srivastava, F
Ms. Deepti Singh, Rajesh Srivastava, Prakash Srivastava (N.P.), Dhruv Mehta,
Harshvardhan Jha (for Mr. Y .S. Deora, for Mis. K.L. Mehta & Co.), S. Sukumaran,
A. Deb Kumar, K. Rajeev, C.D. Singh, Gunratan Pandey, Ms. Kiran Suvama,
P. Venugopal, Harshad V. Hameed (for Mis. K. John & Co.), Lakshmikumaran,
S.K. Vinnani, Gopal Prasad and D.S. Mahra for the appearing parties.
G
The Judgment of the Court was delivered by
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 H
834
SUPREME COURT REPORTS
[2006] 2 S.C.R.
A 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 ifthe nature of the transaction partakes
of the character of both sale and service, then the moot question would be
B whether both legislative authoriti(:s 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
C 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.
D
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
E enactments and therefore they are competent to levy sales tax on the
transactions. These are the cont1~ntions 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 2, and Punjab &
F Haryana3 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 Court in State
of U.P. v. 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
G Courts of Allahabad, Andhra Pradesh and Punjab & Haryana in Escatel
Mobile Communications v. Union of India, (2002) 126 STC 475 (Ker.) The
I.
Union of lnida v. State of UP .. (1999) STC 288.
2.
Union of India v. Secretary, Revenue Dept. (CT-II) Govt. of A.P. (1999) 113 STC 2003.
H 3.
Union of India v. State of Haryana. (2001) 123 STC 539.
-·)
" ..
~'
·~
i
BHARAT SANCHAR NIGAM LTD v. U.0.1. [RUMA PAL, J.]
835
Division Bench of the Kerala High Court considered a situation where the A
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 B
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 C
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 D
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 E
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 F
inter partes in State of UP. v. 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 G
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 UP. v. Union of India and Anr. the two learned Judges of
. this Court had construed the definition of 'business', 'dealer', 'goods' and H
836
SUPREME COURT REPORTS
(2006( 2 S.C.R.
A '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 fdl within the extended meaning of "sale"
B under clause (h) of Section 2 of the U.P. Act.
A consideration of the correctnes' of this conclusion 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
C judicata. Several decisions have been cited in support of their contention.
In Amalgamated Cvaljie/ds ltd., v. Janapada Sabha. (1962] I SCR IO
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
D 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 appdlant's claims were barred by res judicata by reason of the
earlier decision of this Court. Challenging the decision of the High Court the
E appellants approached this Court under Article 136. In Amalgamated Cvaljields
ltd, v. Janapada Sabha, [1963] Supp. I 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
F 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
G
to year, and if any points of factor 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."
H
After considering various earlier authorities on the issue, it was held
that:-
..
·"\
'
BHARATSANCHARNIGAM LTDv. U.0.1. [RUMA PAL. J.]
837
"If for instance, the validity of a taxing statute is impeached by an A
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
B
on the parties to it, but also on all courts in India as a precedent in C
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 successive years, the Court was quite D
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 E
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:
" .... the appellants cannot be precluded from raising the new contentions
on which their challenge against the validity of the notices is based".
F
The question in Mis. Radhasoami Sa/sang v. Commissioner of Income
Tax, [1992] I 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 G
year that the income derived by the Radhasoami Satsang, a religious institution,
was entitled to exemption under Sections 11 and 12 of th~ Income Tax A~t,
1961. The Court said:-
"We are aware of the fact that strictly speaking res judicata does not
H
1
838
SUPREME COCRT REPORTS
[2d06] 2 S.C.R.
A
apply to income tax proceedings. Again, each assessment year being
t •
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
B
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 v. Sales Tax Officer, [ 1965] I SCR 86 in which the
c 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
D 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 saio:-
"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
E
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.