# STATE OF UTTAR PRADESH AND ANR. ETC. ETC v. UNION OF INDIA AND ANR. ETC. ETC

- **Citation:** [2003] 1 S.C.R. 785
- **Court:** Supreme Court of India
- **Decided:** 2003-02-04
- **Bench:** Syed Shah Mohammed Quadri, K.G. B Balakrishnan
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/state-of-uttar-pradesh-and-anr-etc-etc-v-union-of-india-and-anr-etc-etc-19003
- **Pages:** 29

## Headnote

U.P. Trade Tax Act, 1948-Section 2(aa), (c), (d), (h) and section 3, 3F (as amended by U.P. Act 31of1995)-Rentals collected by Department of
Telecommunication (DoT) from subscribers of telephone-Assessibility to tax- C
Held, rentals assessable to tax since DoT is dealer as defined in Section 2(c),
it collects rentals for supply of transfer of use of telephone connection which
is a service, supply of telephone satisfies the requirement of transfer the right
to use the goods within the meaning of sale in Section 2(h) and it also receives
consideration-Constitution of India, 1950-Article 366 clause 29-A.
D
Words and Phrases:
Meaning of-Term 'goods' in the context of Section 2(d) of the U.P.
Trade Tax Act, 1948.
The question which arose for consideration in these appeals was
whether the rentals collected by the Department of Telecommunications
(DoT) from the subscribers of telephone in the State could be assessed to
tax under the Uttar Pradesh Trade Tax Act, 1948.
E
Appellant-State contended that High Court erred in holding that F
DoT is not a 'dealer' within the meaning of the Act; that section 3-F
applies to work contracts only and not to the rental charges collected by
DoT, and that there is no legislative competence in the State to levy trade
tax as the Parliament authorized imposition of service tax under the
Finance Act 1994 on the use of the telephone service by the subscribers; G
that by U.P. Act 31 of 1995 sub-clauses (vii) and (viii) to section 2 (c) of
the U.P. Act were added in the definition of the term 'dealer' to remove
difficulties in the assessment of tax in the transaction relating to transfer
of a right to use any goods; that addition of sub-clause (viii) in the
definition of 'dealer' did not mean that prior to 1995, in various
785
H
786
SUPREME COURT REPORTS
[2003] I S.C.R.
A Ordinances and the U.P. Act, having regard to the extended definition of
'sale' did not include a person or a government 'transferring the right to
use any goods' within the meaning of 'dealer'; that if 'DoT', whether in
the courst> of business or otherwise, transferred a right to use any goods,
it was covered by the definition of 'dealer' even before the 1995
B amendment inserted sub-clause (viii) in Section 2(c) and that position
continued even thereafter; that in supplying instruments, accompaniments
and the telephone connection to a subscriber, the DoT is transferring the
rights to use those goods; that providing a telephone to a subscriber was
a service, and 'transfer of the right to use the instrument, appliances and
the whole exchange system was involved; and that in a composite contract,
C the dominant object test will have to be applied.
Respondents-DoT contended that the DoT would not fall within the
definition of 'dealer' un.der the U.P. Act; that the activity of providing
telephone service is not 'the fransfer of right to use the goods' so as to
attract liability under the U.P. Act; that in a contract providing telephone
D by the DoT the service and sale-transfer of the right to use the goodsare so inter-twined that the rentals cannot be attributed to one or the
other part and, therefore, such a composite contract cannot be dissected
so as to attribute one part of the rentals to service and the other part to
the transfer of the right to use the goods and accordingly assess that part
E of rentals to tax; that as there was no such provision to tax service in
sub-clause (d) of clause 29-A no tax could be levied by the State; and that
it is providing a service which does not involve transfer of a right to use
any goods and that by the Finance Act, 1997, Parliament has imposed
service tax, as such the State cannot levy any tax under the Act.
· p
Intervenor contended that the contract of the subscribers with the
DoT for installation of telephone was an indivisible contract for providing
~
service which cannot be split into two separate contracts- one for transfer
of the right to use any goods and the other for the service provided;

## Text

_Characters 0–39,580 of 72,601. This is a partial read: ask again with offset=39580 for what follows._

STATE OF UTTAR PRADESH AND ANR. ETC. ETC.
A
v.
UNION OF INDIA AND ANR. ETC. ETC.
FEBRUARY 4, 2003
[SYED SHAH MOHAMMED QUADRI AND K.G.
B
BALAKRISHNAN,JJ.]
U.P. Trade Tax Act, 1948-Section 2(aa), (c), (d), (h) and section 3, 3F (as amended by U.P. Act 31of1995)-Rentals collected by Department of
Telecommunication (DoT) from subscribers of telephone-Assessibility to tax- C
Held, rentals assessable to tax since DoT is dealer as defined in Section 2(c),
it collects rentals for supply of transfer of use of telephone connection which
is a service, supply of telephone satisfies the requirement of transfer the right
to use the goods within the meaning of sale in Section 2(h) and it also receives
consideration-Constitution of India, 1950-Article 366 clause 29-A.
D
Words and Phrases:
Meaning of-Term 'goods' in the context of Section 2(d) of the U.P.
Trade Tax Act, 1948.
The question which arose for consideration in these appeals was
whether the rentals collected by the Department of Telecommunications
(DoT) from the subscribers of telephone in the State could be assessed to
tax under the Uttar Pradesh Trade Tax Act, 1948.
E
Appellant-State contended that High Court erred in holding that F
DoT is not a 'dealer' within the meaning of the Act; that section 3-F
applies to work contracts only and not to the rental charges collected by
DoT, and that there is no legislative competence in the State to levy trade
tax as the Parliament authorized imposition of service tax under the
Finance Act 1994 on the use of the telephone service by the subscribers; G
that by U.P. Act 31 of 1995 sub-clauses (vii) and (viii) to section 2 (c) of
the U.P. Act were added in the definition of the term 'dealer' to remove
difficulties in the assessment of tax in the transaction relating to transfer
of a right to use any goods; that addition of sub-clause (viii) in the
definition of 'dealer' did not mean that prior to 1995, in various
785
H
786
SUPREME COURT REPORTS
[2003] I S.C.R.
A Ordinances and the U.P. Act, having regard to the extended definition of
'sale' did not include a person or a government 'transferring the right to
use any goods' within the meaning of 'dealer'; that if 'DoT', whether in
the courst> of business or otherwise, transferred a right to use any goods,
it was covered by the definition of 'dealer' even before the 1995
B amendment inserted sub-clause (viii) in Section 2(c) and that position
continued even thereafter; that in supplying instruments, accompaniments
and the telephone connection to a subscriber, the DoT is transferring the
rights to use those goods; that providing a telephone to a subscriber was
a service, and 'transfer of the right to use the instrument, appliances and
the whole exchange system was involved; and that in a composite contract,
C the dominant object test will have to be applied.
Respondents-DoT contended that the DoT would not fall within the
definition of 'dealer' un.der the U.P. Act; that the activity of providing
telephone service is not 'the fransfer of right to use the goods' so as to
attract liability under the U.P. Act; that in a contract providing telephone
D by the DoT the service and sale-transfer of the right to use the goodsare so inter-twined that the rentals cannot be attributed to one or the
other part and, therefore, such a composite contract cannot be dissected
so as to attribute one part of the rentals to service and the other part to
the transfer of the right to use the goods and accordingly assess that part
E of rentals to tax; that as there was no such provision to tax service in
sub-clause (d) of clause 29-A no tax could be levied by the State; and that
it is providing a service which does not involve transfer of a right to use
any goods and that by the Finance Act, 1997, Parliament has imposed
service tax, as such the State cannot levy any tax under the Act.
· p
Intervenor contended that the contract of the subscribers with the
DoT for installation of telephone was an indivisible contract for providing
~
service which cannot be split into two separate contracts- one for transfer
of the right to use any goods and the other for the service provided; that
under the Indian Telegraph Act, 1885 and the Rules no agreement can be
spelt out to transfer the right to use any goods by the DoT to the
G subscriber; that supply of goods, if any, was incidental to the performance
of contract of service; and that the instrument could be used only when
access to the whole system is provided by DoT and that when the contract
was a composite contract involving service and the transfer of the right __ .
to use any goods, in the absence of any provision in the Constitution
H enabling the State to levy tax for service separately, no tax could be
..
STATE OF U.P. v. U.0.1.
787
levied and collected under the Act.
A
j..
Allowing the appeal, the Court
HELD: I. I. Under Section 2 (c) of the Uttar Pradesh Trade Tax
'
Act, 1948 the word 'dealer' means a person who (whether regularly or
otherwise) carries on the business in U.P. and includes, inter alia, a B
government which (whether in the course of business or otherwise)
.....
undertakes buying, selling, supplying or distributing goods directly or
indirectly for cash or deferred payment or for commission, remuneration
or other valuable consideration [sub-clause (iv)I. The word 'buy' is not
defined. It is antonym of 'sell' and has to be construed in the light of the c
definition of 'sale' in clause (h) of Section 2(c) (viii). It is an inclusive
definition. It means any transfer of property in goods and includes among
-
other transactions, a 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. Thus,. in regard to a transfer of the right to
use any goods both a person and a government will be within the ambit D
of the definition of 'dealer' subject to the following distinction: a person
to be a 'dealer' should carry on the business of buying, selling etc., whether
regularly or otherwise, but a government which buys, sells etc. (whether
in the course of business or otherwise) will be a 'dealer' for purposes of the
JJ.P. Act. Inasmuch as the definition of 'sale' includes any transfer of
E
property in the goods and a transfer of the right to use any goods for any
purpose, the DoT which engages in transfer of right to use any goods will
be a 'dealer' within the meaning of sub-clause (iv) of clause (c) of Section
2 of the U.P. Act. [798-C-FJ
Mis. Vraj/al Manila/ and Co. and Anr. v. State of MP., [1996[ Supp. F
:A
sec 201, referred to.
1.2. After insertion of clause 29-A in Article 366 of the Constitution
and consequential amendments of the term 'sale' in the Act, if 'sale' is
construed in· the sense it was understood before the said amendments, it
will be a clear negation of the constitutional and statutory provisions, G
therefore, such a contention cannot be accepted. Before insertion of subclause (viii) In Section 2(c) of the Act, the activity of a transfer of the
1
right to use any goods fell within the meaning of 'sale' in clause (h) so the
DoT while so doing could not but be a 'dealer' within the meaning of
Section 2(c) of the Act. If that was the position before the enactment of
U.P. Act 31 of 1995 which inserted, inter alia, sub-clause (viii), then H
788
SUPREME COURT REPORTS
(2003] I S.C.R.
A unless a contrary intention appears from the amended provisions, the
pre-amendment position shall continue. Had the intention of the legislature
been to change th&t position and exclude 'a government' from the
definition of 'dealer' in regard to a transfer of the right to use the goods,
it would have said so specifically. It follows that in view of the extended
meaning or'sale of goods, the DoT would continue to be within the ambit
B of a 'dealer' under the U.P. Act even in regard to transfer of a right to
use any goods after insertion of sub-clause (viii) in clause (c) of Section 2
by U.P. Act 31 of 1995. The reasoning of the High Court that in view of
amendment of Section 2(c) in 1995, adding sub-clause (viii), sub-clause
(vi) had to be interpreted differently so as to exclude the DoT from the
C meaning of dealer and also the contention of the respondent-DoT cannot
be accepted. Therefore, insertion of sub-clauses (vii) and (viii) in clause
(c) of Section 2 was by way of abundant caution. This is not an unusual
feature of the legislation. [800-D-H; 801-A)
The Wakefield Local Board of Health v. The West Riding and Grimsby
D Railway Company, LR (1865) QB 84 and Re: Sir Stuart Samuel, (19131
Appeal Cases 514, referred to.
E
Raj Bahadur Kanwar Raj Nath and Ors. v. Pramod C. Bhatt, Custodian
of Evacuee Property, [1955] 2 SCR 977 and Bhikoba Shankar Dhumal (dead)
by Lrs. and Ors. v. Mohan Lal Punchand Tathed and Ors., (1982) l SCC 680,
referred to.
1.3. The term 'goods' is defined in very wide terms so as to bring in
both tangible and intangible objects. Telephone instruments and other
movables, including wiring, cable etc. are undoubtedly goods. However,
F the position of telephone exchange was not without demur on the ground
that they were housed in immovable properties. That objection need not
detain this Court because intangible object, like electricity which is
generated in projects and transmitted through sub -stations, housed in
buildings, has been held to be goods. Therefore, the teleph_one connection
and all other accessories which give access to the telephone exchange
G with or without instruments are 'goods' within the meaning of Section
2(d) of the U.P. Act. [802-F, H; 803-A-DJ
H
Commissioner of Sales Tax, Madhya Pradesh, Indore v. Madhya Pradesh
Electricity Board, Jabalpur, [1969) 1 SCC 200 and State of A.P. etc. v.
National Thermal Power Corpn. Ltd. and Ors. etc., [20021 5 SCC 203, referred
to.
..
-"
)t
STATE OF U.P. v. U.0.1.
789
Mekinley Telephone Company v. Cumberland Telephone Company, 152 A
Wis, 359; 140 N.W. 38; 1913 Wisc. Lexis 77, referred to.
1.4. The submission that any activity in the nature of mere service
or profession is excluded from the definition of the term "business" and
as the DoT is providing service, the same cannot be subjected to tax,
though attractive, is devoid of any substance. The definition of a 'dealer' B
takes in ~a Government', when it sells, supplies, etc. whether in the course
of business or otherwise. Therefore, it is not necessary that the activity of
sale, etc. by the DoT should be in the course of business. Even assuming
that the supply of the telephone to a subscriber, being a service, falls
outside the meaning of the term 'business', the DoT would nonetheless be C
liable to pay tax under the U.P. Act as a 'dealer' for the simple reason of
transferring the right to use the telephone instrument/apparatus and the
whole system· as that falls within the extended meaning of 'sale' under
clause (h) of Section 2 of the U.P. Act. Further only such service is
excluded from the definition of the term 'business' which does not involve
the purchase or sale of goods. In the instant case, it cannot be legitimately D
disputed that the service involves installation of instrument and access to
the exchange and telephone system as a whole which has been found to
fall within the meaning of the term 'sale'. Therefore, the second part of
the definition of the term 'business' is of no help to the DoT. [807-A-DJ
1.5. When DoT provides telephone service, a number is allotted, an E
instrument/apparatus and other appliances are installed at the premises
of a subscriber and the same are connected with the exchange to enable
him to have access to the whole system, to dial and to receive calls. It
makes no difference whether any subscriber replaces instrument of the
DoT with his own instrument because the most important thing is the F
connection of the subscriber's telephone number with the area exchange
and that was provided by the DoT. It needs to be borne in mind that
handing over of the possession or the control of the whole system of
exchange is not sine qua non of completing the transfer of the right to us~
any goods. The submission that the area telephone exchange and other G
systems would remain under the control of the DoT, are irrelevant to
complete such a transfer. Even otherwise, after installation of the
instrument and other appliances, once the DoT connects the telephone
line of the assigned number of the subscriber to the area exchange, access
to other telephones is established. There cannot be denial of the fact that
giving such an access would complete the transfer of the right to use the H
790
SUPREME COURT REPORTS
[2003) I S.C.R.
A goods. 1807-F-H; 808-A-C)
20th Cent111y Finance Corporation ltd. and Anr. v. State of Maharashtra,
~
B
1200016 SCC 12 and Rashtriya !spat Nigam Ltd. v. Commercial Tax'Officer,
(1990) 77 STC 182 and State of Andhra Pradesh and Anr. v.:Rashtriya !spat
Nigam Ltd., 120021 126 STC 114, referred to.
1.6. No provision of the U.P. Act or the said Finance Act, 1994 or
the Constitution is brought to the notice to hold that rentafs collected by
the DoT from the subscriber cannot be subjected to tax as is done under
.the U.P. Act. Merely because service tax is imposed by the Parliament
C under the Finance Act in respect of telephone connection to a subscriber
is no ground to hold that the State cannot levy tax under the U.P. Act.
Therefore, providing telephone service by the DoT which comprises of
allotment of number, installation of an instrument/apparatus and other
appliances at the premises of a subscriber, which are connected with a
telephone line to the area exchange to enable him to have access to the
D whole system, to dial and to receive calls, in effect, falls within the meaning
of the extended definition of 'sale', viz., within the meaning of 'the transfer
of the right to use any goods' and the fact that it is described as service
under the ITA 1885 and the Rules made thereunder or under the Finance
Act, 1994 would not militate against the same being a 'sale' within the
meaning of the U.P. Act. (808-F-H; 809-A, B)
E
1.7. In the case of a composite contract, where the service is the
dominant object of the contract, the supply of goods is incidental to the
enjoyment of the service, it is not possible to separate service from the
supply of goods. In regard to sale of goods where the service is incidental,
F the principl~ of non-separability will apply in the absence of a specific
valid statutory provision; and it would not be permissible to treat such
service as a transfer of right to use the purpose of taxation under the
relevant Sales Tax Act. Where, however, the supply of service as well as
supply of goods are prominent objectives and they have been clubbed
together under a composite contract, it would be possible to treat them
G separately; though covered under the same contract. (810-B, C, F,_ G, HI
State of Himachal Pradesh v. Associated Hotels of India Ltd., (1972) 29
STC SC, referred to.
British Railways Board v. Customs and Excise Commissioners, Simon's
H Tax Cases, (1977) 221; British Airways Pie v. Customs and Excise
+
•
STATE OF U.P. v. U.0.l.
791
Commissioners Si111on Tax r:ase, 11990) 643; Customs and Excise A
Com111issioners v. British Telecommunications Pie Simon Tax Case 11999)
Jf
758, referred to.
1.8. The insertion of clause 29-A in Article 366 of the Constitution
did not altogether obliterate the distinction between sale and service,
except in a case falling under sub-clause {I) thereof. In such a case, the B
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 is
made. In other respects the distinction between sale and service for
imposing tax is maintained. 1810-D, EJ
1.9. In the instant case, the service of telephone connection cannot C
be artificially split into various categories-supply of instruments and
accompaniment on the one hand and supply of telegraphic line/connection
on the other, to name the former as 'sale' and the latter as 'service'. The
analogy of composite contract will apply where 'sale' and 'service' are
two different independent objects. Inasmuch as it is found that the DoT D
is a 'dealer' as defined in Section 2{c) of the U.P. Act and it collects
rentals for the supply of transfer of use of telephone connection, which is
compendiously called 'service' and that the supply of telephone satisfies
the requirements of a transfer of the right to use the goods within the
meaning of 'sale' in Section 2(h); it also receives consideration, therefore,
the requirements of charging under Section 3 read with Section 3(1) are E
satisfied. 1812-C-FI
Union qf India and Ors. v. Secretary, Revenue Department, (CTI/),
Government of Andhra Pradesh and Ors., {1999) 113 STC 203 and Union of
India and Anr. v. State of Haryana and Anr., [2001 I 123 STC 539, F
disapproved.
Mis. Northern India Caterers (India) Ltd v. Lt. Governor of Delhi,
1198012 SCC 167; The Senior Electric Inspector and Ors. v. Laxmi Narayan
Chopra and Ors., 11962) 3 SCR 146; State of Bihar v. Mangat Sao, [1963)
1 SCR 148; Delhi Science Forum and Ors. etc. v. Union of India and Anr. G
etc., 11996] 2 SCC 405 and The State of Punjab v. Mis. Associated Hotels of
India Ltd, [1972) 1 SCC 472, referred to.
CIVIL APPEi.LA TE JURISDICTION : Civil Appeal No. 5781 of
1999.
H
792
SUPREME COURT REPORTS
[2003] I S.C.R.
A
From the Judgment and Order dated 13.9.1999 of the High Court of
U.P. in W.P. 115 of 1995.
WITH
C.A. Nos. 5782-92/99, 3283-3286, 3530-3533, 3705, 3706, 3757, 4336,
B 4107/2000, 3778-3780, 5886 of 2000, C.A. Nos. 877-937/2003.
Sunil Gupta. S. Ganesh, T.L.V. Iyer, Ashok H. Desai, Joseph Vellapally,
R.C. Verma, Mukesh Verma, Vivek Vishnoi, Punit Dutt Tyagi, Ms. Vibha
Mahajan Seth, A. Subba Rao, Tara Chandra Sharma, Hemant Sharma, Y.P.
Mahajan, P. Parmeswaran, Ramesh Babu, M.R., K.R. Sasiprabhu, Rajesh
C Kumar, Manjul Bajpai, Ms. Bina Gupta, Ms. Vanita Bhargava, Ms. Divya
Roy Jha and Ms. Garima Dewan for the appearing parties.
The Judgment of the Court was delivered by
SYED SHAH MOHAMMED QUADRI, J. The State ofUttar Pradesh
D and the Sales Tax Officer (referred to in this judgment as, 'the State') are in
appeal against the common judgment of a Division Bench of the High Court
of Judicature at Allahabad in Writ Petition No.115 of 1995 Union of India
and Anr. v. State of UP. and Anr. and batch dated September 1, 1998.
The State, being of the opinion that the second respondent (The Manager,
E Department of Telecommunications, of the first respondent hereinafter
collectively referred to as the 'DoT') failed to file return of the turnover of
the rentals collected from the subscribers for .'the transfer of right to use' the
telephone system during the year 1988, under the provisions of the Uttar
Pradesh Trade Tax Act, 1948 (for short, 'the U.P. Act'), called upon the
F 'DoT to file return therefor. However, no return was filed by the DoT. The
State assessed the tax payable by the DoT in exercise of the power conferred
under sub-section (3) of Section 7 of the U.P. Act. The DoT challenged the
validity of the orders of assessment in the writ petitions before the High
Court on various grounds. The State pleaded justification fo; passing the
order of assessment in view of the extended definition of the expression 'Tax
G on the sale or purchase of goods' in clause 29-A ** of Article 366 of the
Constitution of India and the relevant provisions of the-' U.P. Act. The High
Court, by the impugned judgment and order, allowed the writ petitions taking
the view that (i) the DoT (Union of India) is not a 'dealer' within the m.eaning
*
[Reported in [1999) 114 STC 288)
H•
By the Constitution (forty-sixth Amendment) Act. 1982]
STATE OF U.P. v. U.O.l. [SYED SHAH MOHAMMED QUADRI, J.] 793
of the Act; (ii) Section 3-F of the Act applies to work contracts only and not A
to the rental charges collected by the DoT; (iii) there is no legislative
competence in the State to levy Trade Tax in view of the fact that the
Parliament authorised imposition of service tax under the Finance Act, I 994
O!l the use of the telephone service by the subscribers; (iv) Article 285(1) of
the Con~titution of lndia prohibits the State from imposing any tax on the
property of the Union of India; and (v) in providing telephone service through B
the DoT, Union of India is discharging its sovereign function which cannot
be subjected to trade tax.
Mr. Sunil Gupta, the learned senior counsel appearing for the appellantsState, assailed the validity of the reasoning and conclusions of the High C
Court on all the points, referred to above.
Mr. Mukul Rohtagi, the learned Additional Solicitor General, appearing
for the respondents-DoT, conceded in our view rightly, that he would not be
supporting the judgment of the High Court on the grounds (iv) and (v)
mentioned above. But he contended, rather vehemently, that the DoT would
not fall within the definition of 'dealer' under the U.P. Act and that the D
activity of providing telephone service would not answer the definition of
'the transfer of right to use the goods' and, therefore, the High Court rightly
quashed the impugned orders of assessment.
Mr. Joseph Vellapally, the learned senior counsel appearing for the E
intervenor contended that the contract of the subscribers with the DoT for
installation of telephone was an indivisible contract for providing service
which cannot be split into two separate contracts - one for transfer of the
right to use any goods and the other for the service provided. He elaborated
the contention by pointing out that under the Indian Telegraph Act, 1885 and
the Rules made thereunder, no agreement can be spelt out to transfer the F
right to use any goods by the DoT to the subscriber. In any event, submitted
the learned senior counsel, supply of goods, if any, was incidental to the
performance of the contract of service. Relying on the decision of this Court
in The State of Punjab v. Mis. Associated Hotels of India Ltd [I 972] I SCC
472 he argued that such composite contracts are indivisible as the parties G
never contracted to sell/supply any goods; such incidental sale/supply, being
merely concomitant of the performance of the service contracted for, would
equally apply to a telephone service contract which incidentally involved
supply of instrument. He further contended that in providing telephone service,
it could not be said that the right to use the whole system of the telephone
exchange was transferred as the possession and control of the whole system H
794
SUPREME COl/RT REPORTS
[2003) I S.C.R.
A was being shared by all the subscribers and it remained in the possession and ,
under the control of the DoT.
B
The short but question of substantial importance arises for consideration:
can rentals collected by the DoT from the subscribers of telephone in the
State, be assessed to tax under the U.P. Act?
There can be no dispute that Entry 54 of List II of the 7th Schedule to
the Constitution of India authorises a State to impose tax on the sale or
purchase of goods other than newspapers, subject of course, to the provisions
only of Entry 92-A of List I which deals with taxes on sale or purchase of
C goods where such sale or purchase takes place in the course of inter-State
trade or commerce. However, levy of tax on the sale or purchase of newspapers
is not within the legislative competence of either the State or the Union. The
expression 'Tax on the sale or purchase of goods' is given extended meaning
by inserting clause 29-A in Article 366 of the Constitution, which, to the
extent relevant, reads as under :
D
E
"29A. 'Tax on the sale or purchase of goods' includes -
(a) to (c) xxx
xxx
xxx
(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) to (t) xxx
xxx
xxx"
After insertion of the aforementioned clause in regard to tax on the sale or
purchase of goods, the State Acts, including the U.P. Act, were amended to
F fall in line with the above definition.
The charging section in the U.P. Act is Section 3, which, insofar as it
is relevant for our purposes, is quoted here under :
"Section 3 - Liability to tax under the Act- (I) Subject to the provisions
G
of this Act, every dealer shall for each assessment year, pay a tax at
the rates provided by or under Section 3-A or Section 3-0 on his
turnover of sales or purchases or both, as the case may be, which
shall be determined in such manner as may be prescribed."
The liability under Section 3 is on every dealer, for each assessment year, to
H pay a tax at the rates provided by or under various sections of the U.P. Act.
..
y-
•
STATE OF U.P. v. U.0.1. [SYED SHAH MOHAMMED QUADRI. J.] 795
Here, it would be useful to refer to Section 3-F which, inter a/ia, prescribes A
rate of tax on 'transfer of the right to use any goods':
''3-F. Tax on the right to use any goods or goods involved in the
execution of works contract - (Notwithstanding anything contained in
Section 3-A or Section 3-AAA or Section 3-D but subject to the
provisions of Sections 14 and 15 of the Central Sales Tax Act, 1956, B
every dealer shall, for each assessment year, pay a tax on the net
turnover of -
(a) transfer of the right to use any goods for any purpose (whether
or not for a specified period) for cash, deferred payment or C
other valuable consideration; or
(b)
t ansfer of property in goods (whether as goods or in some other
form) involved in the execution of a works contract,
at such rate not exceeding [twenty per cent] as the State Government
may, by notification, declare and different rates may be declared for D
different goods or different classes of dealers.
(2) For the purposes of determining the net turnover referred to in
sub-section (I), the following amounts shall be deducted from the
total amount received or receivable by a dealer in respect of a -
E
(a) transfer referred to in clause (a) of sub-section (1) whether such
transfer was agreed to during that assessment year or earlier. -
(i) to (iii) xxx
xxx
xxx
(b) xxx
xxx
xxx"
A perusal of the provision, extracted above, shows that sub-section (I) of
Section 3 F commences with a non-obstante clause, excludes the operation of
Section 3A, Section 3-AAA and Section 3-D but is subject to the provisions
F
of Sections 14 and 15 of the Central Sales Tax Act, 1956. It imposes on
every dealer, for each assessment year, the liability to pay a tax inter a/ia, on G
the net turnover of 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 at such rate, as may be prescribed by the State
•substiluted by U.P. Act No. 31of1985 w.e.f. 13.9.1985.
H
796
SUPREME COURT REPORTS
[2003] I S.C.R.
A Government. The prescribed rate cannot exceed twenty five per cent but the
State Government may, by notification, declare different rates for different
goods or different classes of dealers. The net turnover in respect of a transfer
referred to in clause (a) of sub-section (I), has to be determined after making
deductions enumerated in sub-section (2) read with Rule 44C of the Tax
B Rules, Unfortunately, the High Court failed to notice Section 3F in its entirety
and erred in confining it only to 'goods involved in the execution of works
contract'.
For understanding the true impo1t of the aforementioned provisions, it
would be appropriate to notice the definitions of the terms 'business', 'dealer',
C 'goods', and 'sale' defined in clauses (aa), (c), (d) and (h) respectively, of
Section 2 ·of the U.P. Act, which read as under:
D
E
F
G
H
"(aa)'business', in relation to business of buying or selling goods,
includes -
(i)
xxx
xxx
xxx
(ii)
the execution of any works contract or the transfer of the
right to use any goods for any purpose (whether or not
for a specified period.
(iii)
xxx
xxx
xxx
but does not include any activity in the nature of mere service
or profession which does not involve the purchase or sale of
goods."
(c)
'dealer' means any person who carries on in Uttar Pradesh
(whether regularly or otherwise) the business of buying, selling,
supplying or distributing goods directly or indirectly, for cash
or deferred payment or for commission, remuneration or other
valuable consideration and includes -
(i)
to (iii) xxx
xxx
xxx
(iv)
a Government which, whether in the course' of business
or otherwise buys, sells, supplies or distributes goods,
directly or otherwise for cash or for deferred payment or
for commission, remuneration or other valuable
consideration;
t
v-
'
\
)'
l '
. '
STATE OF U.P. v. U.0.1. [SYED SHAH MOHAMMED QUADRI. l.] 797
(v)
(a)
every person who acts within the State, as an agent of a A
dealer residing outside the State, and buys, sells, supplies
or distributes goods in the State or acts on behalf of such
dealer as -
a mercantile agent as defined in the Sale of Goods Act,
l~O;m
B
(b)
an agent for handling of goods or documents of title
relating to goods; or
(c)
an agent for the collection or the payment of the sale
price of goods or as a guarantor for such collection or C
such payment;
(vi) a firm or a company or other body corporate, the principal
office or headquarters whereof is outside the State having a
branch or office in the State, in respect of purchases or sales,
supplies or distribution of goods through such branch or office. D
(vii) xxx
xxx
xxx
(viii)every person who carries on business of 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 E
consideration.
Provided xxx
xxx"
"(d)
'goods' means every kind or class of movable property
and includes all material commodities and articles involved F
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 G
stationery sold by the Postal Department."
"(h) 'sale' with its grammatical variations and cognate expressions,
means any transfer of property in goods (otherwise than by way
of a mortgage, hypothecation, charge or pledge) for cash or
deferred payment or other valuable consideration, and include - H
798
A
SUPREME COURT REPORTS
[2003) I S.C.R.
(i)
to (iii) xxx
xxx
xxx
(iv)
a 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;"
B
Inasmuch as under Section 3 read with Section 3F of the U.P. Act the
liability to pay tax, inter alia, on 'the transfer of the right to use any goods'
at the specified rate is on a dealer, as defined in Section 2(c) thereof, extracted
above, we shall examine the scope of the definition to ascertain - is the DoT
a dealer?
C
The word 'dealer' means a person who (whether regularly or otherwise)
carries on the business in U.P. and includes, inter a/ia, a government [subclause (iv)] which (whether in the course of business or otherwise) undertakes
buying, selling, supplying or distributing goods directly or indirectly for cash
or deferred payment or for commission, remuneration or other valuable
D consideration. Now it becomes necessary to look into the definition of 'buy'
and 'sell'. The word 'buy' is not defined. It is an antonym of 'sell' and has
to be construed accordingly in the light of the definition of 'sale' in clause
(h), quoted above, It is an inclusive definition. It means any transfer of
property in goods and includes among other transactions, a transfer of the
right to use any goods for any purpose (whether or not for a specified period)
E for cash, deferred payment or other valuable consideration. It is thus clear
that in regard to a transfer of the right to use any goods both a person and
a government will be within the ambit of the definition of 'dealer' subject to
the following distinction: A person to be a 'dealer' should carry 011 the
business of buying selling etc., whether regularly or otherwise, but a
F government which buys, sells etc. (whether in the course of business or
otherwise) will be a 'dealer' for purposes of the U.P. Act. Inasmuch as the
definition of 'sale' includes any transfer of property in the goods and a
transfer of the right to use any goods for any purpose, the DoT which engages
in transfer of right to use any goods will be a 'dealer' within the meaning of
sub-clause (iv) of clause (c) of Section 2 of the U.P. Act.
G
H
In Mis. Vraj/a/ Manila/ and Co. and Anr. v. State of M.P. and Anr.,
[1986] Supp. SCC 201, this Court considered the meaning of Explanation II
to Section 2 ( d) of the Madhya Pradesh General Sales Tax Act, 1959, which
was similar in terms to sub-clause (iv) of clause {c) of Section 2 of the U.P.
Act and held:
\
STATE OF U.P. "· u.o.r. [SYED SHAH MOHAMMED QUADRI. J.] 799
"The language of Explanation II shows that its purpose is to create A
a legal fiction. and that while under the main clause, for a person to
be a dealer. he must carry on the business of buying, selling. supplying
or distributing goods. even if the Central Government or a State
Government or any of their departments or offices does not carry on
such business, if it buys, sells, supplies or distributes goods, it is to B
be deemed to be a dealer for the purposes of the M.P. Sales Tax Act,
that is, for the purposes of the levy and collection of tax unde1· M.P.
Sales Tax Act. After the amendment of clause (d) by the 1971 Act,
it is irrelevant for the purposes of the levy of tax under the M.P. Sales
Tax Act whether the Central Government or a State Government or
any of their departments or offices have bought or sold goods in the C
course of business."
While so, by U.P. Act 31 of 1995, sub-clauses (vii) and (viii) which
deal with 'person' were inserted in clause (c) of Section 2 with effect from
September 3, 1985. Sub-Clause (vii) incorporates business of transfer of
property in goods involved in the execution of a work contract and sub- D
clause (viii) incorporates business of transfer of the right to use any goods for
any purpose.
In the present discussion, we are concerned with the effect of insertion
of sub-clause (viii) in clause (c) of Section 2 on the aforementioned conclusion E
that the DoT is a 'dealer' falling in sub-clause (iv) of the said clause. It was
co"tended by the learned Additional Solicitor General that in sub-clause (iv)
about 'a government,' it was not specifically provided as was done in subclause (viii) in regard to a person, that he must be carrying on the business
of a transfer of the right to use any goods for any purpose; in the absence of
those words in clause (iv), the DoT, even if it transferred a right to use any f
goods for any purpose for rentals, would not fall within the meaning of the
tenn 'dealer'. He urged that every section, every clause and every word in
. a legislation should be given some meaning; it could not be presumed that
. the legislature carried out the exercise in futility in adding sub-clause (viii)
. to Section 2(c). The intention of the legislature, it was submined, in adding
-f · sub-clause (viii) to Section 2(c) was only to make it clear that 'a government' G
would not be a 'dealer' in regard to the extended meaning of 'sale' which
included the transfer of a right to use any goods but only in regard to sale
of goods in its traditional meaning. Mr. Gupta countered that contention by
inviting our anention to the Statement of Objects and Reasons of U.P. Act 31
of 1995 that the sub-clauses (vii) and (viii) were added in the definition of H
800
SUPREME COURT REPORTS
[2003) I S.C.R.
A the term 'dealer' to remove difficulties in the assessment of tax in the
transaction relating to tt"ansfer of a right to use any goods. The legislature,
submitted the learned counsel, earlier amended the definition of 'sale' in
Section 2(h) leaving the definition of 'dealer' static but later is was thought
that ex ahtmdanti cautela the definition of 'dealer' might also be amended
B like the definition of'sale' and by U.P. Act No. 31of1995 a new package
of amendmen~ was introduced relating to the transfer of a right to use any
goods by iidding sub-clause (viii) to clause (c) of Section 2. He argued that
addition of sub-clause (viii) in the definition of 'dealer' did not mean that
prior to 1995, in various Ordinances and the U.P. Act, having regard to the
extended definition of 'sale', did not include a person or a government
C 'transferring the right to use any goods' within the meaning of 'dealer.'. It
was emphasised that if 'the DoT', whether in the cou~se of business or
otherwise, transferred a right to use any goods, it was covered by the definition
of 'dealer' even before the 1995 amendment inserted sub-clause (viii) in
clause (c) of Section 2 and that position continued even thereafter.
D
We are afraid, we cannot accede to the contentions of the learned
Additional Solicitor General. After insertion of clause 29-A in Article 366 of
\
the Constitution and consequential amendments of the term 'sale' in the U.P.
Act, if 'sale' is construed in the sense it was understood before the said
amendments, it will be a clear negation of the constitutional and statutory
E provisions, therefore, such a contention cannot be accepted. We have already
held above that before insertion of sub-clause (viii) in Section 2(c) of the
U.P. Act, the activity of a 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, fell within the meaning of 'sale' in clause (h)
so the DoT while so doing could not. but be a 'dealer' within the meaning of
F Section 2(c) of the U.P. Act. If that was the position before the enactment of
U.P. Act 31 of I 995 which inserted, inter alia, sub-clause (viii), then unless
a contrary intention appears from the amended provisions, in our view, the
pre-amendment position shall continue. Had the intention of the legislature
been to change that position and exclude 'a government' from the definition
G of 'dealer' in regard to a transfer of the right to use the goods, it would have
said so specifically. It follows that in view of the extended meaning of sale
of goods, the DoT would continue to be within the ambit of a 'dealer' under
the U.P. Act even in regard to transfer of a right to. use any goods after
insertion of sub-clause (viii) in clause (c) of Section 2 by U.P. Act 3 I of
1995. We are, therefore, unable to uphold the reasoning of the High Court '
H that in view of amendment of Section 2(c) in 1995, adding sub-clause (viii),
STATE OF U.P. '" U.0.1. [SYED SHAH MOHAMMED QUADRI. J.) 801
sub-clauses (vi) had to be interpreted differently so as to exclude the DoT A
1"
from the meaning of'dealer' and also the contention of the learned Additional
Solicitor General. In our view, insertion of sub-claoses (vi) and (vii) in clause
(c) of Section 2 was, as submitted by Mr. Gupta, by way of abundant caution.
This is not an unusual feature of the legislation. As long back as in 1865 in
The Wakefield local Board of Health v. The West Riding and Grimsby Railway B
Company, LR (1865) QB 84, Cockburn, C.J. held:
"I am opinion that the objection raised by the respondents was
untenable. I think the words inserted at the end of the definition in
the interpretation clause, section 3 of the 8 Vict.c.20, were interested,
as Mr.