Holding

A telephone connection is a service, not a sale of goods, because electromagnetic waves are not goods; only handsets (and possibly SIM cards) may be taxed as goods.

Summary

The Supreme Court examined whether the provision of telephone services by telecom operators constitutes a sale of goods, a service, or a composite contract of both, and consequently whether State governments can levy sales tax under Entry 54 of List II. The petitioners argued that the transaction is purely a service, invoking the Telegraph Act and the Service Tax provisions, while the States contended that a deemed sale of the right to use goods under Article 366(29A)(d) justified sales tax. The Court held that electromagnetic waves and radio frequencies are not "goods" within the meaning of Article 366(29A)(d) and that only tangible handsets (and possibly SIM cards) qualify as goods. It applied the dominant‑nature test, concluding that the telephone connection is essentially a service and any sale element is limited to the handsets, which may be taxed separately. The Court also clarified that the aspect theory does not permit the inclusion of service value in the sale price for sales‑tax purposes and remanded the question of SIM‑card taxability to the assessing authorities. The writ petitions and related appeals were disposed of, with the Court allowing the appeals of the service providers and directing further determination on SIM‑card issues.

Issues considered

The nature of the transaction in providing telephone connections: sale, service, or composite contract.
Whether electromagnetic waves or radio frequencies constitute "goods" under Article 366(29A)(d).
Whether the dominant‑nature test applies to split a composite contract for sales‑tax purposes.
Whether State sales tax can be levied on the service element of telecommunication.
The applicability of the aspect theory to combine service and sale values.
The taxability of SIM cards under sales tax.
The relevance of res judicata in successive assessment years.

Legislation cited

Constitution of Indias. Article 286, s. Article 366(12), s. Article 366(29A), s. Schedule VII List I Entry 92-C, s. Schedule VII List II Entry 54
Finance Act, 1994s. Section 65(16)(b)
Finance Act, 2002s. Section 149(90)(b)
Finance Act, 2003s. Section 159(105)(110)
Indian Telegraph Act, 1885s. Section 4
Sale of Goods Act, 1930s. Section 2(7), s. Section 4
Telecom Regulatory Authority of India Act, 1997s. Section 2(k)

Subjects

telecommunicationsales taxservice taxcomposite contractdeemed saleArticle 366(29A)dominant nature testres judicataSIM cardelectromagnetic waves

Judgment

·~·.

BHARAT SANCHAR NIGAM LTD. AND ANR. A
v.
UNION OF INDIA AND ORS.

MARCH 2, 2006

[RUMA PAL, DR. AR. LAKSHMANAN AND B
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,
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 ofright 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 ofgoods or the price
ofgoods in the value of service-Question whether SIM Card is 'goods' is left
to be determined by the hsessing Authority.

Sale ofGoods-Deemed Sale-Levy ofSales Tax-Composite sale-service
G
--; 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,
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 ofGoods- 'Sale and Goods '--Deemed Sale-Meaning and Scope-
Effect 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 test-
Application ofArticle 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 determined-
Question 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 service-
Levy 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
transaction involved and that the attempt of the several States to levy tax
F
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)

State of Madras v. Gannon Dunkerley & Co., IX STC 353 (SC),
referred to.
E
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.
B
Associated Cement Company Ltd. v. Commissioner of Customs, [2001)
4 sec 593, followed.

J 4.1. What are the "goods" in a sale transaction, therefore, remains
primarily a matter of contract and intention. The seller and such purchaser
would have to be ad idem as to the subject matter of sale or purchase. 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 ofNCT ofNew Delhi, (2000) IO SCC 420,
referred to.
r
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
SHARATSAN 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)
D
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.
E
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
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
Larsen and Toubro Ltd v. Union of India, (1993( 1 SCC 365, referred to.
D
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.
Several different services were included in the definition. Section 65(16)(b)
E
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
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 B
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 c
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 D
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) E

Amalgamated Coalfields Ltd v. Janapada Sabha, (19631 Supp. I SCR
172; Radhasoami Satsang v. Commissioner ofIncome Tax, [1992) 1 SCC 659
and Junior Telecom Officers Forum v. Union of India, (1993) Supp. 4 SCC
693, relied on.
F
-i 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.
G
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
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
ofIndia 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

Bengal Immunity Company v. State of Bihar, (1955( 2 SCR 603 and •
Himmatlal Harilal ,\,/ehta v. State of Madras, (19541 SCR 1122, followed.

E
CIVIL ORIGINAL JURISDICTION : Writ Petition (Civil) No. 183 of
2003.

(Under Article 32 of the Constitution of India.)

F 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."

After considering various earlier authorities on the issue, it was held
that:-
H
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 B
opinion in the present case. In this connectiOn, it would be relevant
to add that even if a direct decision of this Court on a point of law
does not operate as res judicata in a dispute for a subsequent year,
such a decision would, under Art. 141, have a binding effect not only
on the parties to it, but also on all courts in India as a precedent in 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:
F
" .... the appellants cannot be precluded from raising the new contentions
on which their challenge against the validity of the notices is based".

The question in 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
the order, it would not be at all appropriate to allow the position to
B 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
challenge was to assessment proceedings under the Madhya Bharat Sales Tax
c 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. In that
case, the court may ultimately adopt the same view which had been
adopted on the earlier occasion; but if a new ground is urged, the
F
court may have to consider it on the merits, because, strictly speaking
the principle of res judicata may not apply to such a case. That, in
fact, is the effect of the decision of this Court in the Amalgamated
Cua/fields ltd. and Anr. v. TheJanapada Sabha, Chhindwara, [1963]
Supp. I SCR.172 .. ln our opinion, the said general observations must
G be read in the light of the important fact that the order which was
challenged in the second writ petition was in relation to a different
period and not for the same period as was covered by the earlier ... ...

-
petition."

But as far as a challenge to the same assessment order is concerned, it
H was held:-
BHARAT SANCHAR NIGAM LTD v. U.0.1. [RUMA PAL, J.] 839
"that if constructive res judicata is not applied to such proceedings A
..... ) a party can file as many writ petitions as he likes and take one or two
points every time. That clearly is opposed to considerations of public
policy on which res judicata is based and would mean harassment
and hardship to the opponent. Besides, if such a course is allowed to
be adopted, the doctrine of finality of judgments pronounced by this
Court would also be materially affected. We are, therefore, satisfied B
that the second writ petition filed by the appellant in the present case
is barred by constructive res judicata".

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

Nevertheless, we think that a petitioner is entitled to relief ex debito
justitiae if he establishes ( 1) violation of the principles of natural
justice in that he was not a party to the !is but the judgment adversely

- affected his interests or, if he was a party to the !is, he was not served
with notice of the proceedings and the matter proceeded as if he had
notice, and (2) where in the proceedings a learned Judge failed to
E

disclose his connection with the subject-matter or the parties giving
scope for an apprehension of bias and the judgment adversely affects
the petitioner".
F
To a similar effect is the case of Junior Telecom Officers Forum and
Ors. v. Union of fodia and Ors., [1993] Supp. 4 SCC 693 where the appellants
had intervened in earlier proceedings. After the controversy was decided in
those proceedings the appellants sought to reagitate the same issues in respect
of the same matter contending that they had no opportunity of being heard.
The submission was rejected and it was held that the second round was G
impermissible .
... The decisions cited have uniformly held that res judicata does not
apply in matters pertaining to tax for different assessment yea~s because res
~
judicata applies to debar Courts from entertaining issues on the same cause
H
840 SUPREME COURT REPORTS [2006] 2 S.C.R.

A 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
B 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
C is per incuriam. However, these are fetters only on a coordinate bench which,
failing the possibility of availing of either of these gateways, may yet differ
with the view expressed and refer the matter to a bench of superior strength
or in some cases to a bench of superior jurisdiction.
.
In our opinion, the preliminary objection raised by the State of U.P.
D therefore, rests on a faulty premise. The contention of the petitioners/appellants
in these matters is not that the decision in State uf U.P. v. U.O.l (supra) for
that assessment year should be set aside, but that it should be overruled as
an authority or precedent. Therefore, the decisions in Devi Lal Modi v. Sales
Tax Officer (supra) and in Hurra v. Hurra (supra) are not germane.

E A decision can be set aside in the same tis on a prayer for review or
an application for recall or Under Art. 32 in the peculiar circumstances
mentioned in Hurra v. Hurra. As we have said overruling of a decision takes
place in a subsequent tis where the precedential value of the decision is
called in question. No one can dispute that in our judicial system it is open
F to a Court of superior jurisdiction or strength before which a decision of a
Bench oflower strength is cited as an authority, to overrule it. This overruling
would not operate to upset the binding nature of the decision on the parties
to an earlier tis in that tis, for whom the principle of res judicata would
continue to operate. But in tax cases relating to a subsequent year involving
the same issue as an earlier year, the court can differ from the view expressed
G if the case is distinguishable or per incuriam. The decision in State of U.P.
v. Union of India related to the year I988. Admittedly, the present dispute
relates to a subsequent period. Here a coordinate Bench has referred the
matter to a Larger Bench. This Bench being of superior strength, we can, if
we so find, declare that the earlier decision does not represent the law. None
H of the decisions cited by the State of U. P. are authorities for the proposition
BHARAT SANCHARNIGAMLTDv. U.0.1. [RUMA PAL, J.) 841
that we cannot, in the circumstances of this case, do so. This preliminary A -
... )
objection of the State of U.P. is therefore rejected.

Coming now to the merits of the case, the petitioners contended that the
service providers are licencees under Section 4 of the Telegraph Act, 1885
and provide 'telecommunication services' as provided under Section 2(k)
under the Telecom Regulatory Authority of India Act, 1997. Service tax is B
imposed on them under the Finance Act, 1994 on the basis of the tariff
realised from the subscribers. They further contended that in providing such
service there is in fact no 'sales' effected by the service providers and that
the States do not have the legislative competence to impose sales tax on the
rendition of telecommunication services. Article 366 (29A) which extended C
the definition of 'sale' in the Constitution did not apply to the transaction in
question. Clause (d) of Article 366(29-A) relied upon by the respondents
contemplates a transfer of a legal right to use goods. According to the
petitioners there is no transfer of any legal right by the service providers nor
any delivery of any goods which may be covered under the Telegraph Act,
1885 as the same is barred and prohibited in terms of the licence granted to D
service providers under Section 4 of that Act. It is submitted without a delivery
of goods, there could be no transfer of any right to use those goods as
contemplated under Article 366(29-A)(d). It is the petitioners' case that the
decision in State of U.P. v. Union of India (supra) was erroneous not only
because it held that the telephone connection and all other accessories which E
gives access to the telephone exchange with or without instruments are goods
but also because there was in fact no transfer of any of these equipment to
a subscriber. The predominant element and intention in the transaction was
one of service and not of sale. It is submitted that taxing telecommunication
services as a deemed sale under Entry 54 of List II would be violative of
Article 286 of the Constitution as the same involves connecting subscribers F
throughout the territories of India without any regard to State boundaries.

On the interpretation of Article 366(29A) it was submitted that the
fiction in one clause could not be read in to the other. It is said that the
disintegration of compos1Le transactions has to be specifically enabled by the
Constitution and that it was not within the competence of State legislation to G
divide a composite transaction otherwise. It is also submitted that the language
of clause (d) was distinct from the language used in clause (b) of Clause 29A
of Article 366. Our attention was drawn to the absence of the use of the word
"involved" in the former sub clause. It is emphasized that there must be
goods of which the right to transfer is covered by sub clause (d) of clause H ,
1

842 SUPREME COURT REPORTS [2006) 2 S.C.R.

A 29A of Article 366. It is contended that there was no transfer of any right to
use any goods and the parties never intended for such transfer. It is submitted I -
that the court should apply the standard of the ordinary man for deciding

B
whether the transaction in question was a contract for service or for transfer
of a right to use deemed goods. The obligation of the service provider is
merely to transmit voice and the subscriber was not interested in stipulating
as to how the voice/data is to be conveyed to the other end. It is for the
-
service provider to choose the medium as it thinks fit. The SIM card was not
goods it merely enables activation.

According to the petitioners prior to the 46th amendment composite
contracts were not exigible to States sales tax under Entry 54, List II. The
c legal fiction created in Article 366(29A) provided for specific composite

-
contracts to be subjected to sales tax. Therefore, even after the 46th amendment
other transactions had been held not to be sales. Reliance has been placed on
the Everest Copiers v. State of Tamil Nadu, [1996] 5 SCC 390, Rainbow v.
State of Madhya Pradesh, [2000] 2 SCC 385 and Hindustan Aeronautics v.
D State of Karnataka, [1984] I SCC 707. It was contended in addition that the
restrictions regarding the States inability to tax interstate sales would continue
to apply. Furthennore, the activity of providing the connection involved the
use of instruments embedded to the earth or attached to what is embedded in
the earth and therefore was immoveable property and outside the scope of
E
sales tax. Thus there were no goods nor any transfer of any goods involved
in the activity.

It is pointed out that none of the States could contend that
-
telecommunication was not a service. It was submitted that the service did •
not allow for transfer of right to use goods. There was no transfer of control
F or equipments at any stage. It is submitted that what the service providers
provide was a means of communication and what was transferred was the
sounds of the message or signals which were generated by the subscribers
themselves. It is further submitted that the SIM card was merely an "
identification device for granting access and was a means to access services.

G The service providers in the appeal from the decision of Kerala High
Court have submitted that the High Court had not appreciated the facts . The
service providers had imported the SIM cards and sold them to franchises
who then sold them to the subscribers. It is submitted that the authorities had
wrongly proceeded on the basis that there was a sale of SIM cards by the
. ..

service providers to the subscribers. It is pointed out that the sale was
H
BHARAT SAN CHAR NIGAM LTD v. U.0.1. [RUMA PAL, J.] 843
factually and legally distinct from the activity of giving the connection or A
activation -0f'the SIM cards. The decision of the Kerala High Court has also
been impugried on the ground that it overlooked inter alia questions of
competence raised by the petitioners, the explanation to the definition of
turnover as well as the ratio of Gannon Dunkerley and misapplied the aspect
theory.
B
As we have noted earlier,' the Union of India has supported the service
providers and contended that the transaction in question was only "service".

·:< It has been argued on behalf of the State of Uttar Pradesh that the writ
petition had been filed by BSNL challenging Sections 2(h) and 3F of the U.P. C
Trade Tax Act, 1948. The challenge was expressly given up and therefore the
petition was not maintainable. It was also submitted that there were different
factual scenarios as a result of which the possible outcome of a particular
assessment could not be predicted and it was not appropriate to intervene
under Article 32. According to the State, no fundamental right was allegedly
infringed. It is contended that the Central Government has the exclusive D
monopoly over "telegraphs" under the Telegraph Act, 1985. A "telegraph" as
defined in that Act would cover the transactions in question. In granting
-.1 permission to the service providers by the issue of licence, there was transfer
of the right to use the telegraph which right was further given to the subscribers
in a transaction which would be covered by Article 366(29A)(d). On the
interpretation of Article 366(29A) it has been submitted that prior to the E
introduction of 92C in List I, the residuary entry could not be relied upon in
view of the specific entry in Entry 54 of List II. It has been submitted inter
alia that delivery of the goods was not necessary for the purpose of transferring
the right to use and this had been held in the decision of this, Court in 20th
Century Finance Corporation Ltd. and Anr. v. State of Maharashtra, [2000) F
6 SCC 12. It is submitted that in any event different aspects of a given
transaction can fall within the legislative competence of two legislatures and
both would have the power to tax that aspect. It is submitted that the question
whether the goods were moveable or immoveable property as well as the
question whether the tax was being levied on inter state sales or not were all
matters of assessment and that the judgment in State of U.P. v. Union of G
India, should be affirmed.

In addition, it has been submitted for the respondents that the expression
"telephone" and "telephony" do not necessarily include the factor of service.
A subscriber makes use of the telephone system as a matter of right and is
H
844 SUPREME COURT REPORTS [2006) 2 S.C.R.

A capable of asserting that right even against the Government. The subscriber's
right to use his telephone line is to the exclusion of every other person and I •
to that extent the right of the Government/service providers stands denuded.
The right is based on contract and is in addition to the right to the service
provided by the service providers. The SIM Card operates as key for access
to the telephone system or network and symbolizes the right of participation
B by a subscriber in the telephone system. These are two distinct transactions,
one as the transferree of the legal right to use the telephone and the other of
a contract of service. These are two different aspects, each attracting a different
tax. Service is only one of the purposes for which the transfer or deemed sale
is made by the Government. The Government may among other rights also
C allow the licencee to give telephone connection as its agent or act as a service
provider for the establishment, maintenance and working of the telephone
system. The use of the words ''any goods" in sub-clause (d) of (29A) of
Article 366 according to the respondents showed that the goods need not
necessarily have been transferred by the transferor. No delivery was in fact
required under sub-clause (d). h is further emphasised that sub-clause (d)
D also use the words "for any purpose". This could include t!ie purpose of
service. In any event, it is submitted, the meaning and scope of sub-clause
(d) in Article 366 (29A) cannot be limited on account of the fact that a
transaction may have been described as a service in any legislative enactment
or contract or licence. Similarly, the expression "goods" had a very wide and
E comprehensive meaning and assuming delivery is necessary would in~lude
the entire telephone system as well as telephone appliances, instruments,
materials, towers, exchanges, etc. The means, namely the electrical or electro
magnetic means of energy will also form parts of the goods. It is further
submitted that whether in any particular case the telephone system included
machines or apparatus fixed to the ground was a question of fact to be
F decided in an individual case during the assessment proceedings. Countering
the submission that the sales would be inter state sales, it is submitted that
the situs of the taxable event under the Sales Tax Act would be where the
transfer of the right takes place between the service providers and the
subscribers. This was also a question which would vary from case to case and
G would have to be ultimately factually decided by an assessment authority.
According to the respondents, apart from the transfer aspect of the transaction
being isolated as an independent taxable event from the aspect of service,
ultimately the question whether there was any splitting up of a composite
transaction was also to be determined during assessment proceedings.

H It was submitted that the mere fact that the Union was levying tax on
BHARAT SAN CHAR NIGAM LTD v. U.0.1. [RUMA PAL, J.] 845
- certain taxable services could not be used to deny the State's powers to tax A
the objects/provisions in the service. Therefore, the State's powers must be
read harmoniously with the Union's power and it is only when such
reconciliation is impossible that the primacy should be given to the non
obstante clause under Article 248( I). Alternatively it was submitted that the
theory of aspect would apply so that what was service in one aspect was a
sale in the other. It was also submitted that because in sub-clauses (b) and (f) B
of Clause (29A) of Article 366 the tax on a component in a transaction of
' works is permissible, it cannot be assumed that in sub-clause (d) tax could
not be imposed on an element of the sale component of that transaction. The
sub-clause has no words or limitations and must be read as broadly as the
language permitted. It was submitted that the test of dominant object of a C
composite works contract was no longer relevant after the 46th Constitutional
Amendment. It was submitted that the service providers transfer the right to
use radio frequency channel to a subscriber for a specific duration and thus
have effected a deemed sale of goods under Article 366 (29A) (d).

These broadly speaking are the respective contentions and in our opinion, D
the issues which arise for consideration in these matters are:-

"\ (A) what are "goods" in telecommunication for the purposes of Article
366 (29A)(d)?
(B) is there any transfer of any right to use any goods by providing
E
access or telephone connection by the telephone service provider
to a subscriber ?
(C) is the nature of the transaction involved in providing telephone
connection a composite contract .of service and sale? If so, is it
possible for the States to tax the sale element?
F
(D) If the providing of a telephone connection involves sale is such
sale an inter state one?
(E) Would the "aspect theory" be applicable to the transaction enabling
the States to levy sales tax on the same transaction in respect of
which the Union Government levies service tax. G
Before taking up the issues for decision seriatim, it is necessary for us
_.. to deal with the.two further preliminary objections raised by the respondents
on the merits. Regarding the first of such objections that the writ petitions
have become infructuous - it may be true that in relation to the U.P. Trade
Tax Act, I 948, the challenge to Section 2(h) and 3F which have basically re- H
846 SUPREME COURT REPORTS [2006] 2 S.C.R.

A produced Article 366(29A) has not been pressed by the petitioners. What has
been argued however, is for a construction of Article 366(29A) particularly,
clause (d) thereof. That construction, if accepted by the Court, would be
sufficient to grant the petitioners the relief claimed. The issue of interpretation
of Article 366(29A) is, therefore., a live one.

B The second cbjection was that the writ petitions under Article 32 were
not maintainable. The writ petitions raised questions relating to the competence
of the States to levy sales tax on telecommunication service. This is not an
issue which could have been raised and decided by the assessing authorities.
If the State Legislatures are incompetent to levy the tax, it would not only be
C an arbitrary exercise of power by the State authorities in violation of Article
14, it would also constitute an umeasonable restriction upon the right of the
service providers to carry on trade under Article 19(1 )(g). (See Bengal
Immunity Company v. State of 81har, [1955] 2 SCR 603; Himmatlal Harilal
Mehta v. State of Madras, [1954] SCR 1122.) We are consequently unable
to accept either of these contentions of the respondents.
D
To answer the questions formulated by us, it is necessary to delve
briefly into the legal history of A11. 366 (29A). Prior to the 46th Amendment,
composite contracts such as works contracts, hire-purchase contacts and
catering contracts were not assessable as contracts for sale of goods. The
locus classicus holding the field was State of Madras v. Gannon Dunkerley
E & Co. IX STC 353 (SC). There this Court held that the words "sale of goods"
in Entry 48 of List II, Schedule VII to the Government of India Act, 1935
did not cover the sale sought to be taxed by the State Government under the
Madras General Sales Tax Act, 1939. The classical concept of sale was held
to apply to the entry in the legislative list in that there had to be three
F essential components to constitute a transaction of sale- namely, (i) an
agreement to transfer title (ii) supported by consideration, and (iii) an actual
transfer of title in the goods. In the absence of any one of these elements it
was held that there was no sale. Therefore, a contract under which a contractor
agreed to set up a building would not be a contract for sale. It was one
contract, entire and indivisible and there was no separate agreement for sale
G of goods justifying the levy of sales tax by the provincial legislatures. "Under
the law, therefore, there cannot be an agreement relating to one kind of
property and a sale as regards another". Parties could have provided for two
independent agreements, one relating to the labour and work involved in the
execution of the work and erection of the building and the second relating to
H the sale of the material used in the building in which case the latter would
BHARAT SANCHAR NIGAM LTD v. U.0.1. [RUMA PAL, J.] 847

...- ) be an agreement to sell and the supply of materials thereunder, a sale. Where A
there was no such separation, the contract was a composite one. It was not
classifiable as a sale. The Court accepted the submission of the assessee that
the expression "sale of goods" was, at the time when the Government of
Iµ_dia Act, 1935 was enacted, a term of well recognized legal import in the
general law relating to sale of goods and must be interpreted in Entry 48 in
List II of Schedule VII of the 193 5 Act" as having the same meaning as in B
the Sale of Goods Act, 1930. According to. this decision if the words "sale
of goods" have to be interpreted in their legal sense, that sense can only be
what it has in the law relating to sale of goods. To use the language of the
Court:

" To sum up, the expression "sale of goods" in Entry 48 is a nomen
c
juris, its essential ingredients being an agreement to sell movables for
a price and property passing therein pursuant to that agreement. In a
building contract which is, as in the present case, one, entire and
indivisible - and that is its norm, there is no sale of goods, and it is
not within the competence of the Provincial Legislature under Entry D
48 to impose a tax on the supply o~. the materials used in such a
contract treating it as a sale".
~-I
Following the ratio in Gannon Dunkerley, that "sale" in Entry 48 must
be construed as having the same meaning which it has in the Sale of Goods
Act, 1930, this Court as well as the High Courts held that several composite E
transactions in which there was an element of sale were not liable to sales
tax.

Thus in the State of Punjab v. Mis. Associated Hotels of India Ltd.,
[1972] l sec 472 the question was whether the meals served at hotels to the
residents were subject to sales tax. The Court held that if the difference is not F
distinct, the Revenue would not be entitled to split up the contract, estimate
approximately the charges for such materials and treat them as chargeable on
the mere ground that the transaction involved transfer of goods, whose value
must have been taken into consideration while fixing charges for the service.

In 1967 the Madras High Court in A. V. Meiyappan v. Commissioner of G
Commercial Taxes, Board of Revenue, Madras and Anr., (1967) XX STC
115 had to consider a situation where the Sales Tax Authorities had held that
though the transaction was described as a lease for 49 years, the assessee had

4. Now Entry 54 of List II of the .Seventh Schedule to the Constitution. H
848 SUPREME COURT REPORTS [2006] 2 S.C.R.
I
A effected a sale of the negative print of a picture for a consideration and y

therefore the transaction was liable to sales tax under the Madras General
Sales Tax Act, 1959. The Court set aside the demand holding that the
transaction did not connote a sale at all and it was therefore not liable to sales
tax.

B The problem relating to the power of States to levy tax on the sale of
goods was then referred to the Law Commission by the Government of India.
The Law Commission submitted its report in I 974 on a consideration of the
scope of the levy of sales tax by State Governments in respect of works
contracts, hire purchase transactions and also the transfer of controlled
C commodities by virtue of statutory orders. The Law Commission noted that
these transactions resembled sales in substance and suggested three drafting
devices for conferring the power of taxing these transactions on the States
viz.

(a) amending State List, entry 54, or

D (b) adding a fresh entry in the State List, or

(c) inserting in article 366 a wide definition of "sale" so as to include ,
works contracts.

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

"[(29-A) "tax on the sale or purchase of goods" includes

(a) a tax on the transfer, otherwise than in pursuance of a
H contract, of property in any goods for cash, deferred payment
BHARAT SANCHAR NIGAM LTD v. U.0.1. [RUMA PAL, J.] 849
or other valuable consideration; A~

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

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

(d) a tax on the transfer of the right to use any goods for any
purpose (whether or not for a specified period) for cash,
deferred payment or other valuable c01:1sideration;

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

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

and such transfer, delivery or supply of any goods shall be deemed
to be a sale of those goods by the person making the transfer, delivery E
or supply and a purchase of those goods by the person to whom such
transfer, delivery or supply is made;

Clause (a) covers a situation where the consensual element is lacking.
This normally takes place in an involuntary sale. Clause (b) covers cases
relating to works contracts. This was the particular fact situation which the F
Court was faced with in Gannon Dunkerley and which the Court had held
was not a sale. The effect in law of a transfer of property in goods involved
in the execution of the works contract was by this amendment deemed to be
a sale. To that extent the decision in Gannon Dunkerley was directly overcome.
Clause ( c) deals with hire purchase where the title to the goods is not
transferred. Yet by fiction of law, it is treated as a sale. Similarly the title to G
the goods under Clause (d) remains with the tral".sferor who only transfers the
· right to use the goods to the purchaser. In other words, contrary to A. V.
Meiyappan 's decision a lease of a negative print of a picture would be a sale.
Clause (e) covers cases which in law may not have amounted to sale because
the member ·of an incorporated association would have in a sense begun both H
850 SUPREME COURT REPORTS [2006] 2 S.C.R.

A the supplier and the recipient of the supply of goods. Now such transactions { ~
are deemed sales. Clause (f) pertains to contracts which had been held not to
amount to sale in State of Punjab v. Mis. Associated Hotels of India Ltd
(supra). That decision has by this clause been effectively legislatively
invalidated.

B All the clauses of Article 366 (29A) serve to bring transactions where
one or more of the essential ingredients of a sale as defined in the Sale of
Goods Act 1930 are absent, within the ambit of purchase and sales for the
purposes of levy of sales tax. To this extent only is the principle enunciated
in Gannon Dunkerly limited. The amendment especially allows specific
C composite contracts viz. works contracts (Clause (b )), hire purchase contracts
(Clause (c)), catering contracts (Clause (e)) by legal fiction to be divisible
contracts where the sale element could be isolated and be subjected to sales
tax.

Gannon Dunkerley survived the 46th Constitutional Amendment in two
D respects. First with regard to the definition of 'sale' for the purposes of the
Constitution in general and for the purposes of Entry 54 of List II in particular
except to the extent that the clauses in Art.366(29A) operate. By introducing
separate categories of 'deemed sales', the meaning of the word 'goods' was
not altered. Thus the definitions of the composite elements of a sale such as
intention of the parties, goods, delivery etc. would continue to be defined
E according to known legal connotations. This does not mean that the content
of the concepts remain static. Couns must move with the times.' But the 46th
Amendment does not give a licernce for example to assume that a transaction
is a sale and then to look around for what could be the goods. The word
"goods" has not been altered by the 46th Amendment. That ingredient of a
p sale continues to have the same definition. The second respect in which
Gannon Dunkerley has survived is with reference to the dominant nature test
to be applied to a composite transaction not covered by Article 366(29A).
Transactions which are mutant sales are limited to the clauses of Article
366(29A). All other transactions would have to qualify as sales within the
meaning of Sales of Goods Act 1930 for the purpose of levy of sales tax.
G
Of all the different kinds of composite transactions the drafters of the
46th Amendment chose three specific situations, a works contract, a hire
purchase contract and a catering contract to bring within the fiction of a
deemed sale. Of these three, the first and third involve a kind of service and

H 5. See Attorney General v. Edition telephone Company (1886) QBD 244.
BHARAT SAN CHAR NIGAM LTD v. U.0.1. [RUMA PAL,J.] 851

sale at the same time. Apart from these two cases where splitting of the A
+) service and supply has been Constitutionally pennitted in clauses (b) and (g)
of Clause 29A of Art. 366, there is no other service which has been pennitted
to be so split. For example the clauses of Art. 366(29A) do not cover hospital
services. Therefore, if during the treatment of a patient in a hospital, he or
she is given a pill, can the sales tax authorities tax the transaction as a sale? B
Doctors, lawyers and other professionals render service in the course of which
can it be said that t~ere is a sale of goods when a doctor writes out and hands
over a prescription or a lawyer drafts a document and delivers it to his/her .
client? Strictly speaking with the payment of fees, consideration does pass
from the patient or client to the doctor. or lawyer for the documents in both
cases. c
The reason why these services do not involve a sale for the purposes
of Entry 54 of List II is, as we see it, for reasons ultimately attributable to
the principles enunciated in Gannon Dunkerley 's case, namely, if there is an
instrument of contract which may be composite in fonn in any case other
than the exceptions in Article 366(29-A), unless the transaction in truth D
represents two distinct and separate contracts and is discernible as such, then
the State would not have the power to separate the agreement to sell from the
agreement to render service, and impose tax on the sale. The test therefore
for composite contracts other than those mentioned in Article 366 (29A)
continues to be - did the parties have in mind or intend separate rights arising E
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
contract6. We will, for the want of a better phrase, call this the dominant"
nature test.
F
In Rainbow Colour Lab & Anr. v. State of MP. & Ors., [2000] 2 SCC
385, the question involved was whether the job rendered by the photographer
in taking photographs, developing and printing films would amount to a
"work contract" as contemplated under Article 366 (29A) (b) of the
Constitution read with Section 2(n) of the M.P. General Sales Tax Act for the
purpose of levy of sales tax on the business turnover of the photographers. G
The Court answered the questions in the negative because, according to
the Court:-

6. See Atiyah: The sale of goods (1995 reprint) p.27 H
1

852 SUPREME COURT REPORTS [2006) 2 S.C.R.

A " Prior to the amendment of Article 366, in view of the judgment of
I
this Court in State of Madras v. Gannon Dunkerley & Co. (Madras) ~

Ltd.. ( 1958) 9 STC 353: AIR 1958 SC 560 the States could not levy
sales tax on sale of goods involved in a works contract because the
contract was indivisible. All that has happened in law after the 46th
Amendment and the judgment of this Court in Builders' case [ 1989]
B 2 SCC 645 is that it is now open to the States to divide the works
contract into two separate contracts by a legal fiction: (i) contract for
sale of goods involved in the said works contract, and (ii) for supply
of labour and service. This division of contract under the amended
law can be made only if the works contract involved a dominant
c intention to transfer the property in goods and not in contracts where
the transfer in property takes place as an incident of contract of
service .. What is pertinent to ascertain in this connection is what was
the dominant intention of the contract on facts as we have noticed
that the work done by the photographer which as held by this Court
in STO v. B.C'. Kame [1977] I SCC 634 is only in the nature of a
D service contract not involving any sale of goods, we are of the opinion
that the stand taken by the re$pondent State cannot be sustained".

This conclusion was doubted in Associated Cement Companies Ltd. v.
Commissioner of Customs, [2001] 4 SCC 593 saying :-

E "The conclusion arrived at in Rainbow Colour Lab case (2000] 2
sec 385, in our opinion, runs counter to the express provision
contained in Article 366(29-A) as also of the Constitution Bench
decision of this Court in Builders Assn. of India v. Union of India,
[1989] 2 sec 645".

F We agree. After the 46th Amendment, the sale element of those contracts
which are covered by the six sub-clauses of clause (29A) of Article 366 are
separable and may be subjected to sales tax by the States under Entry 54 of
List II and there is no question of the dominant nature test applying. Therefore •
when in 2005, C.K. Jidheesh v. Union of India (2005) 8 SCALE 784 held
that the aforesaid observations in Associated Cement (supra) were merely
G
obiter and that Rainbow Colour Lab (supra) was still good law, it was not
correct. It is necessary to note that Associated Cement did not say that in all
,.,_
cases of composite transactions the 46th Amendment would apply.

What are the "goods'' in a sales transaction, therefore, remains primarily
H a matter of contract and intention. The seller and such purchaser would have
BHARAT SAN CHAR NIGAM LTD v. U.0.1. [RUMA PAL, J.] 853
to be ad idem as to the subject matter of sale or purchase. The Court would A
have to arrive at the conclusion as to what the parties had intended when they
entered into a particular transaction of sale, as being the subject matter of sale
or purchase. In arriving at a conclusion the Court would have to approach the
matter from the point of view of a reasonable person of average intelligence.

Article 366(12) has defined the word "goods" for the purpose of the B
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,
i 1930 as meaning "every kind of movable property other than actionable
claims and money; and includes stock and shares, growing crops, grass, and
things attached to or forming part of the land which are agreed to be severed C
before sale or under the contract of sale." The U.P. Trade Tax defines "goods"
as meaning:

"every kind or class of movable property and includes all material
commodities and articles involved in the execution of a works contract, .
and growing crops, grass, trees and things attached to or fastened to D
anything permanently attached to the earth which under the contract
of sale are agreed to be severed but does not include actionable
claims, stocks, shares, securities or postal stationery sold by the Postal
·Department.'

The State Sales Tax legislations have, subject to minor variations, E
adopted substantially a similar definition of "goods" for the purpose of their
Sales Tax Acts. There have been several decisions of this Court on the
interpretation of the word 'goods' in the context of different State sales tax
enactments. One of the such decisions was the case of Anraj v. Government
of Tamil Nadu, [1986] 1 SCC 414 in which the question was whether sale of
a lottery ticket was a sale of goods for the purpose of Entry 54 of List II. This F
Court held that the sale of a lottery ticket confers on the purchaser thereof
two rights, (a) right to participate in the draw and, (b) a right to claim a prize
contingent upon his being successful in the draw. It was held that the first
was a right "in praesenti" and the second a contingent right. It was concluded
that of these two rights the rig!'lt to participate in a draw was "goods" for the G
purpose of levying sales tax. The decision was followed by a Bench of three
Judges in the case of Vikas Sales Corporation v. Commissioner ofCommercial
Tax, [!Cf96] 4 SCC 733 to hold that REP licences/Exim scrips were goods on
the sale of which sales tax could be levied. Both the decisions were doubted
in the case of Sunrise Associates v. Government of NCT of New Delhi, [2000]
IO sec 420 Jn that case, the Court formed a prima facie opinion that the H
854 SUPREME COURT REPORTS [2006) 2 S.C.R.

A decision in Anraj required re-consideration on the view that the only right of
-
( '
the purchaser of a lottery ticket is to take a chance of winning the prize and
that there was no good reason to split the transaction of the sale of a lottery
ticket into the acquisition of (i) the right to participate in the lottery draw and
(ii) right to win the prize depe:nding on chance.

B The judgment in that decision is awaited. For the time being, we will
assume that an incorporeal right is 'goods',

In fact the question whether 'goods' for the purpose of sales tax may
be intangible or incorporeal need not detain us. In Associated Cement
C Companies Ltd. v. Commissioner of Customs, [2001] 4 SCC 593, the value
of drawings was added to their cost since they contained and formed part of
the technical know-how which was part of a technical collaboration between
the importer of the drawings and their exporter. It was recognized knowledge
in the abstract may not come within the definition of ·goods' in Section 2(22)
of the Customs Act.
D
This view was adopted in Tata Consultancy Services v. State of Andhra
Pradesh. (supra) for the purposes of levy of sales tax on computer software.
It was held:-

"A "goods" may be a tangible property or an intangible one. It would
E become goods provided it has the attributes thereof having regard to
(a) its utility; (b) capable of being bought and sold; and (c) capable
of being transmitted, transferred, delivered, stored and possessed. If
a software whether customized or non- customised satisfies these
attributes, the same would be goods".

F This in our opinion, is the correct approach to the question as to what
are "goods" for the purposes of sales tax. We respectfully adopt the same.

The State respondents in their submissions had initially differed as to
what constituted 'goods' in telecommunication. Ultimately, the consensus
among the respondents appeared to be that the "goods" element in
G telecommunication were the electromagnetic waves by which data generated
by the subscriber was transmitted to the desired destination. The inspiration
for the argument has been derived from the provisions of the Indian Telegraph
Act, 1885 which defines telegraph 7 as meaning:

H 7. Amendment in 2004 by Act 8/2004 with effect from 1.4.2002.
BHARAT SANCHAR NIGAM LTD v. U.0.1. [RUMA PAL, J.] 855
-....{"-- ) "telegraph' means any appliance, instrument, material or apparatus A
used or capable of use for transmission or reception of signs, signals,
writings, images and sound or intelligence of any nature by wire,
visual or other electro-magnetic emissions, Radio waves or Hertzian
waves, galvanic, electric or magnetic means.;

Explanation. "Radio waves" or "Hertzian waves" means electro B
magnetic waves of frequencies, lower than 3,000 giga-cycles per sound
propagated in space without artificial guide."

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

"telegraph line" means a wire or wires used for the purpose of a
telegraph, with any .casing, coating, tube or pipe enclosing the same,
and any appliances and apparatus connected therewith for the purpose DI
of fixing or insulating the same .
.,.
Section 4 of the 1885 Act gives exclusive privilege in respect of
telecommunication and the power to grant licences to the Central Government.
Pursuant to such power, licences have been granted to service providers.
According to the service providers in terms of their licence no further transfer E
of the rights to use the telegraph could be affected by them. Therefore, what
was provided was a service by the utilization of the telegraph licenced to the
service providers for the benefit of the subscribers.

We will proceed on the basis that incorporeal rights may be goods for
the purposes of le":ying sales tax. Assuming it to be so, the question is F
-!
whether these electro magnetic waves can fulfill the criteria laid down in
Tata Consultancy for goods. In our opinion the question must be answered
in the negative. Electromagnetic waves have been described in
Telecommunications Law : Davit/ Gilles & Roger Marshal: Butterworths:-

"1.14. Electromagnetic waves travel through free space from one G
. point to another but can be channeled through w11veguides which
inay be metallic cables, optical fibres or even simple tubes. All
electromagnetic waves are susceptible to interference from one another

- H
856 SUPREME COURT REPORTS [2006] 2 S.C.R.

A and unrelated electrical energy can distort or destroy the information
I '
they carry. To reduce these problems they have been organized within
the spectrum into bands of frequencies or wavelengths for the
transmission of particular 1types of services and information".

The process of sending a signal is as follows:-
B
"Data is superimposed on a carrier current or wave by means of a
process called modulation. Signal modulation can be done in either
of two main ways: analog and digital. In recent years, digital
modulation has been getting more common, while analog modulation
methods have been used less and less. There are still plenty of analog
c signals around, however, and they will probably never become totally
extinct. Except for DC signals such as telegraph and baseband, all
signal carriers have a definable frequency or frequencies. Signals also
have a property called wavelength, which is inversely proportional to
the frequency". (Encyclopedia of Technology Terms of Techmedia)
D It is clear, electromagnetic waves are neither abstracted nor are they
consumed in the sense that they are not extinguished by their user. They are
not delivered, stored or possessed. Nor are they marketable. They are merely
the medium of communication. What is transmitted is not an electromagnetic
wave but the signal through such means. The signals are generated by the
E subscribers themselves. In telecommunication what is transmitted is the
message by means of the telegraph. No part of the telegraph itself is
transferable or deliverable to the subscribers.

The second reason is more basic. A subscriber to a telephone service
could not reasonably be taken to have intended to purchase or obtain any
F right to use electromagnetic waves or radio frequencies when a telephone
connection is given. Nor does the subscriber intend to use any portion of the
wiring, the cable, the satellite, the telephone exchange etc. At the most the
concept of the sale in a subscrib<:r's mind would be limited to the handset
that may have been purchased for the purposes of getting a telephone
G connection. As far as the subscriber is concerned, no right to the use of any
other goods, incorporeal or corporeal, is given to him or her with the telephone
connection.

We cannot anticipate what may be achieved by scientific and
technological advances in future. No one has argued that at present
H electromagnetic waves are abstractable or are capable of delivery. It would,
BHARAT SAN CHAR NIGAM LTD v. U.0.1. [RUMA PAL, J.] 857

therefore, appear that an electro-magnetic wave (or radio frequency as A
.r )
contended by one of the counsel for the respondents), does not fulfill the
parameters applied by the Supreme Court in Tata Consultancy. for detennining
whether they are goods, right to use of which would be a sale for the purpose
of Article 366(29-A)(d).

The learned Judges in State of U.P. v. Union of India (supra) held that B
"telephone instruments and other appliances including wiring, cable etc. are
"undoubtedly "goods" within the definition of the word in Section 2(d) of the
U.P. Act''. It was also held a telephone exchange being housed in immovable
properties would make no difference because a tangible object like electricity
which is .generated in projects and transmitted through sub-stations housed in C
building has been held in CST v. M.P. Electricity Board [1969] I SCC 200
and State of A.P. v. National Thermal Power Corpn. Ltd., [2002] 5 SCC 203
to be goods.

Had the learned Judges limited their observations to the telephone
instruments we could have had no quarrel with the opinion stated. But they D
have in a subsequent portion of their judgment clarified that there a telephone
connection along with all other accessories to the telephone exchange with
or without instruments are goods within the meaning of Section 2(d) of th~
U.P. Act. The essence of the 'goods' therefore, according to the learned
Judges, lay in the entire system. To arrive at this conclusion, the reliance on
the two cited judgments was inapposite. It was the sale and purchase of E
electricity which was being considered in those cases. The goods was the
electrical energy. What the customers were being charged for was not the
medium that was being used to transfer the electricity, but the electrical
energy itself. In the case of telecommunications on the other hand, if the
decision in State of UP. v. Union of India and the respondent's submission F
are correct, the customers are not to be charged for what is being transferred
through the medium but the use of the medium itself. Additionally in the
State of Andhra Pradesh v. National Thermal Power Corporation (supra),
the issue before the Constitution Bench was not whether electricity was goods
for the purposes of sales tax but the situs of the sale of electricity.
G
The learned Judges also in State of U. P. v. Union of India drew support
from the decision of the Supreme Court of Wisconsin (USA) in McKinley
Telephone Co. v. Cumberland Telephone Co. 152 Wis 359: 140 NW 39:
1913 Wisc Lexis 77 which had held that the furnishing of the telephone
services might be classed as the supplying of a commodity constituting a H
858 SUPREME COURT REPORTS (2006) 2 S.C.R.

A subject of commerce.
i. •
The decision in Mckinley Telephone, even if it were to be held of
persuasive value, is not really relevant. That was a case where two competing
telephone companies contracted that one should confine its business to the
city and the other to rural lines out of the city. The rural company had the
B option to buy the rural lines of the other. Two questions fell for consideration.
The first question was whether the contract was specifically enforceable. This
question was also answered in the affinnative. The second question was
whether the contract was in violation of the anti-trust laws. This was answered
in the affinnative. It was in that context that the Court opined that:

c "It is obvious that the statute is directed against contracts which are
violative of the public policy of the state respecting restraints of trade
and competition in the supply of any commodity in general use
constituting a subject of commerce. The furnishing of telephone
services may be classed within the general tenns of the statute as the
D supplying of a commodity constituting a subject of commerce."

Apart from the fact that the context was wholly different, the question
whether a telephone service was ·'goods" or not was not really in issue.
Incidentally, the decision in Mckinley Telephones has been distinguished in
several subsequent decisions of the United States. [See Fleetway, Inc. v.
E Public Service Interstate Transport Co .. 72 F.2d 761 (1934). State
Broadcasting Co. v. United Press Intern. Inc., 369 F 2d 268 ( 1966), Columbia
Broadcasting System, Inc. v. Amana Refrigeration Inc. 295 F.2d 375 (1961))

For the reasons stated by us earlier we hold that the electromagnetic
waves are not 'goods' within the meaning of the word either in Art. 366(12)
F or in the State Legislations. It is not in the circumstances necessary for us to
determine whether the telephone system including the telephone exchange
was not goods but immoveable property as contended by some of the
petitioners.

In the State of UP. v. Union of India, (supra) it was also held:-
G
"Handing over of possession is not sine qua non of completing the
transfer of the right to use any goods, as was held by a Constitution
Bench of this Court in 20th Century Finance Corpn. Ltd. v. State of
Maharashtra, [2000] 6 SCC 12. Once DoT connects the telephone
-
line of the assigned number of the subscriber to the area exchange,
H
BHARAT SANCHA~f)l~GAM LTD v. U.0.1. [RUMA PAL, J.] 859
access to other telephones is established. There cannot be denial of A
the fact that giving such an access would complete the transfer of the

I right to use the goods".

With respect, the decision in 20th Century Finance Corporation Limited
v. State of Maharashtra, cannot be cited as authority for the proposition that
delivery of possession of the goods is not a necessary concomitant for B
completing a transaction of sale for the purposes of Artide 366 (29A) (d) of
the Constitution. In that decision the Court had to determine where the taxable
event for the purposes of sales tax took place in the context of sub-clause (d}
of Article 366 (29A). Some States had levied tax on the transfer of the right
to use goods on the location of goods at the time of their use irrespective of C
the place where the agreement for such transfer of right to use such goods
was made. Other States levied tax upon delivery of the goods in the State
pursuant to agreements of transfer while some other States levied tax on
deemed sales on the premise that the agreement for transfer of the right to
use had been executed within that State (vide paragraph 2 of the judgment
as reported). This Court upheld the third view namely merely that the transfer D
of the right to use took place where the agreements were executed. In these
circumstances the Court said that:-

"No authority of this Court has been shown on behalf of respondents
that there would be no completed transfer of right to use goods unless
the goods are delivered. Thus, the delivery of goods cannot constitute E
a basis/or levy of tax on the transfer of right to use any goods. We
are, therefore, of the view that where the goods are in existence, the
taxable event on the transfer of the right to use goods occurs when
a contract is executed between the lessor and the lessee and situs of
.. sale of such a deemed sale would be the place where the contract in F
respect thereof is executed. Thus, where goods to be transferred are
available and a written contract, is executed between the parties, it is
at that point situs of taxable event on the transfer of right to use
goods would occur and situs of sale of such a transaction would be
the place where the contract is executed.
G
(emphasis ours)
/ ~-
In determining the situs of the transfer of the right to use the goods, the
Court did not say that delivery of the goods was inessential for the purposes
of completing the transfer of the right to use. The emphasized portions in the
quoted passage evidences that the goods must be available when the transfer H
860 SUPREME COlJRT REPORTS [2006] 2 S.C.R.

A of the right to use the goods take place. The Court also recognized that for ••
oral contracts the situs of the transfer may bt: where the goods Me delivered
(see para 26 of the judgment)

In our opinion, the essence of the right under Article 366 (29A) (d) is
that it relates to user of goods. It may be that the actual delivery of the goods
B is not necessary for effecting the transfer of the right to use the goods but the
goods must be available at the time of transfer must be deliverable and
delivered at some stage. It is assumed, at the time of execution of any
agreement to transfer the right to use, that the goods are available and t-'"
deliverable. If the goods, or \\-hat is claimed to be goods by the respondents,
are not deliverable at all by the service providers to the subscribers, the
c question of the right to use those goods, would not arise.

In State of Andhra Pradesh and Anr. v. Rastriya /spat Nigam Ltd.,
[2003] 3 SCC 214, it was claimed by the Sales Tax Authorities that the
transaction by which the owner of certain machinery had made them available
D to the contractors was a sale. The Court rejected the submission saying that:-

" .... the transaction did not involve transfer of right to use the machinery
in favour of contractors. The effective control of the machinery even
while the machinery was in use of the contractor was that of the
respondent Company; the contractor was not free to make use of the
E machinery for the works other than the project work of the ·respondent >
or.. .. (para 4 page 315)

But in the case of Agrawal Brothers v. State of Haryana and Anr.•.
[ 1999] 9 sec 182 when the assessee had hired shuttering to favour of
contractors to use it in the course of construction of buildings it was fouqd
F that possession of the shuttering materials was transferred by the assessee to
the customers for their use and therefore, there was a deemed sale within the .-
meaning of sub-clause (d) of Clause 29-A of Article 366. What is noteworthy
is that in both the cases there were goods in existence which were delivered
to the contractors for their use. In one case there was no intention to transfer
the right to use while in the other there W!lS.
G
,__
But if there are no deliverable goods in existence as in this case, there
~.
is no transfer of user at all. Providing access or telephone connection does
not put the subscriber in possession of the electromagnetic waves any more
than a toll collector puts a road or bridge into the possession of the toll payer
H by lifting a toll gate. Of course the toll payer will use the road or bridge in
BHARATSANCHARNIGAMLTDv. U.0.1. [RUMA PAL,J.] 861
.•••. ',, i:r·
one sense, But the distinction with a sale of goods is that th~ user would'be A
of the thing or goods delivered. The delivery may not be simultaneous with
the transfer of the right to use. But the goods must be in existence and
deliverable when the right_ is sought to be transferred.

Therefore whether goods are incorpllteal or corporeal, tangible or
intangible, they must be ~eliverable. To the extent that the decision in State B
of U.P. v. Union of India held otherwise, it was, in our humble opinion
erroneous.

It has been held in Builders Association' of India v. Union of India
(1989) 2 SCC 645 that the clauses in Article 366 (29A) do not amount to a
separate entry in List II of the 7th Schedule to the Constitution enabling the C
States to levy tax on sales and purchase independent of Entry 54 thereof. (see
also Larsen & Toubro Ltd v. Union of India, (1993] 1 SCC 365, 383).
Article 366 (29A) as introduced by the 46th Amendment not being equivalent
to a separate entry in List II is subject to the same limitations as Entry 54 of
that List. At the time of amending Article 366, Article 286 was also amended D
by"the introduction of clause (3) which reads as:-

"(3) Any law of a State shall, in so far as it imposes, or authorizes
the imposition of:-

(a) a tax on the sale or purchase of goods declared by Parliament by E
law to be of special importance in inter-State trade or commerce;
(b) a tax on the sale or purchase of goods, being a tax of the nature
referred to in sub-clause (b), sub-clause (c) or sub_-clause (d) of
clause (29A) of article 366, be subjected to such restrictions and
conditions in regard to the system oflevy, rates and other incidents F
of the tax as Parliament may by law specify."
·-I
Therefore the deemed sales included in Entry 54 List II would also be
subject to the limitations of Art. 286, Art. 366(29-A).

Being aware of the dangers of allowing the residuary powers Parliament
under Entry 97 of List I to swamp the legislative entries in the State list, we G
have interpreted Entry 54, List II together with Article 366 (29A) without
~-- whittling down the interpretation by referring to the residuary provision.
Having completed the exercise, we now tum our attention to the latter.

In 1994, service tax was introduced by Parliament under Chapter V of H
[2006] 2 S.C.R.
'
-
862 SUPREME COURT REPORTS

A the Finance Act, 1994 \Vith reference to its residuary power under Entry 97
List I of the Seventh Schedule to the Constitution. Under the 1994 Act,
~ .
'taxable services' which were subject to levy of service tax were defined.
Several different services were included in the definition. Section 65(16)(b)
included service provided to a subscriber by the telegraph authority in relation
to a telephone connection. wit~ effect from the com!,pg into force of the 1994
B ~

as a taxable service. Under Section 66, tax was imposed at the rate of five
percent of the value of the taxable services provided to any person by the
person responsible for collecting the service tax. The value of the taxable
service in relation to a telephone connection provided to the subscribers, was ~:

to be the gross total amount received by the telegraph authority from the
c subscribers. The 1994 Act was amended from time to time by extending the
meaning of taxable service. We are concerned with two amendments, one
made in 2002 and the other in 2003. By Section I49(90)(b) of the Finance
Act, 2002, service to a subscriber by a telephone authority was continued as
a taxable service. "Telegraph" was defined in Section 149(92) as having the
same meaning assigned to it in clause (I) of Section 3 of the Indian Telegraph
D Act, 1885. "Telegraph authority" was defined incorporating the definition of
the phrase Section 3(6) of the 1885 Act and included "a person who has been
granted a licence under the first proviso in Section 4( 1) of that Act. The
liability of service providers to service tax was continued under Section
159(105)(110) (b) and (111) of the Finance Act, 2003. The definition of
E subscriber was added in sub section (I 04) as meaning "a person to whom any
service of a telephone connection or a facsimile (Fax) or a leased circuit or
a pager or a telegraph or telex has been provided by a telegraph authority".
Finally in 2003, List 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 telephone
F connection. The question is - is the sale element is each of these several
services and in particular the service of a telephone connection taxable by the
States?
.-
As we have said Art. 366(29A) has no doubt served to extend the
meaning of the word 'sale' to the extent stated but no further. We cannot
G presume that the Constitutional Amendment was loosely drawn and must
proceed on the basis that the parameters of 'sale' were carefully defined. But
having said that, it is sufficient for the purposes of this judgment to find, as
we do, that a telephone service is nothing but a service. There is no sales

H
element apart from the obvious one relating to the hand set if any. That and
any other accessory supplied by the service provider in our opinion remair
-
BHARAT SANCHARNIGAM LTDv. U.0.1. [RUMA PAL, J.] 863
. Jt to be taxed under the State....Sales Tax Laws. We have given the reasons A
earlier why we have reached this conclusion.

This brings us to the decision of the Kerala High Court in Escotel.

In that case Escotel was admittedly engaged in selling cellular telephone
instruments, SIM cards and other accessories and was also paying Central B
Sales Tax and Sales Tax under the Kerala General Sales Tax Act, 1963 as
applicable. The question was one of the valuation of these goods. State Sales
Tax Authorities had sought to include the activation charges in the cost of the
SIM card. It is contended by Escotel that the activation was part of the
service onwhich service tax was being paid and could not be included within
the purview of,.the sale .. T~e l<.~rala High Court also dealt with the case of C
. BPL, a service provider. According to BPL, it did not sell cellular telephones .
. As far as SIM cards were concerned, it was submitted that they had no sale
. value. A SIM card merely represented a means of the access and identified
the subscribers. This was part of the service of a telephone connection. The
Court rejected this submission finding that .the SIM card was "goods" within D
\ the definition of the word in the State Sales Tax Act.

' It is not possible for this Court to opine finally on the issue. What a
SIM card represents is ultimately a question of fact as has been correctly
submitted by the Statt:s. In determining the issue, however the Assessing
Authorities will_ have to -keep in. mind the following principles: If the SIM E
Card is not sold by the assessee to the subscribers but is merely part of the
services rendered by the service providers, then a SIM card cannot be charged
separately to sales tax. It would depend ultimately upon the intention of the
parties. If the parties intended that the SIM card would be a separate object
... of sale, it would be open to the Sales Tax Authorities to levy sales. tax
thereon. There is insufficient material on the basis of which we can reach ·a F
d~cision. However we emphasise that if the sale of a SIM card is merely
incidental to the service being provided and only facilitates the identification
of the subscribers, their credit and other details, it would not be assessable
to sales tax. In our opinion the High Court ought not to have finally determined
the issue. In any event, the High Court erred in including the cost of the G
service in the value of the SIM ca~~- by re lying on the aspects doctrine. That
0

doctrine merely deals with legislative competence. As has been succinctly
. stated in Federation of Hotel & Restaurant Association of India v. Union of
India, [ 1989] 3 SCC 634- "subjects which in one aspect and for one purpose
fall within the power of a particular legislature may in another aspect and for H
864 SUPREME COURT REPORTS [2006] 2 S.C.R.

A another purpose fall within another legislative power. They might be ~ •
overlapping; but the overlapping must be in law. The same transaction may
involve two or more taxable events in its different aspects. But the fact that
there is overlapping does not detract from the distinctiveness of the aspects".
No one denies the legislative competence of States to levy sales tax on sales
provided that the necessary concomitants of a sale are present in the transaction
B and the sale is distinctly discernible in the transaction.

This does not however allow State to entrench upon the Union list and
tax services by including the cost of such service in the value of the goods.
Even in those composite contracts which are by legal fiction deemed to be
C divisible under Art. 366(29A), the value of the goods involved in the execution
of the whole transaction cannot be ass.essed to Sales Tax. As was said in
Larsen & Toubro v. Union of India (supra):-

"The cost of establishment of the contractor which is relatable to
supply of labour and services cannot be included in the value of the
D goods involved in the execution of a contract and the cost of
establishment which is relatable to supply of materials involved in
'the execution of the works contract only can be included in the value
of the goods".

For the sanie reason the Centre cannot include the value of the SIM
E cards, if they are found ultimately to be goods, in the cost of the service. As •
was held by us in Gujarat Ambu1a· Cements Ltd. v. Union of India (2005) 4
sec 2I4,22s:
'.'This m\ltual exclusivity which has been reflected in Article 246(1)
means that taxing entries must be construed so as. to maintain
F -. exclusiviJY. _Although generally speaking, a liberal interpretation must
be given to taxing entries., this would not bring within its purview a ..
tax on subject-matter which a fair reading of the entry does not cover.
If \n substance, the statute is not referable to a field given to the State,
the Court will not by any principle of interpretation allow a statute
not covered by it to intrude upon this field."
G
We will therefore !lave to allow the appeals filed by BPL in Civil
Appeal Nos. 3329-30. of 2002 and Escatel in Civil Appeal No.2408 of 2002
and remand the matter to the Sales Tax Authorities concerned for determination
of the issue relating to SIM Cards in the light of the observations contained
H in this judgment.
BHARAT SANCHAR NJGAM LTD v. U.0.1. [LAKSHMANAN, J.] 865
As far as the question whether providing of a telephone connection A
involves interstate sales, now that it has been clarified that electromagnetic
waves or radio frequencies are not goods, the issue is really academic.

For the reasons aforesaid, we answer the questions formulated by us
earlier in the following manner:
B
(A) Goods do not include electromagnetic waves or radio frequencies
for the purpose of Article 366(29A)(d). The goods in
telecommunication are limited to the handsets supplied by the
'; service provider. As far as the SIM cards are concerned, the issue
is left for determination by the Assessing Authorities.
(B) There may be a transfer of right to use goods as defined in answer
c
to the previous question by giving a telephone connection.
(C) The nature of the transaction involved in providing the telephone
connection may be a composite contract of service and sale. It is
possible for the State to tax the sale element provided there is a
discernible sale and only to the extent relatable to such sale.
D
\
(D) The issue is left unanswered.
t
(E) 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 the service. E
The writ petitions and appeals are disposed of accordingly. No order as
to costs.

DR AR LAKSHMANAN, J. I had the privilege of perusing the
judgment proposed by my learned Sister - Hon'ble Mrs. Justice Ruma Pal. p
While respectfully concurring with the conclusion arrived by the learned
Judge, I would like to add the fo !lowing few paragraphs:-

The principal issue that arises in this batch of cases relate to the
imposition of sales tax in the light of Article 366(29A) clause (d) on different
activities carried on by telecommunication servic;: provider. G
The petitioner Bharat Sanchar Nigam Ltd. (for short 'BSNL') Is a
licensee under the Indian Telegraph Act, 1885. The licence of the petitioner
is obtained from the Government of lndiii which is the same as the licence
given also to various private telecom operators which entitles the BSNL to
H
SUPREME COURT REPORTS [2006) 2 S.C.R.
866
A carry the activity of operating telegraph limited to the scope of
telecommunication facilities.

The entire infrastructure/instruments/appliances and exchange are in
the physical control and possession of the petitioner at all times and there is
neither any physical transfer of such goods nor any transfer of right to use
B such equipment or apparatuses.
To constitute a transaction for the transfer of the right to use the goods
the transaction must have the following attributes: ""
•
a. There must be goods available for delivery;
c b. There must be a consensus ad idem as to the identity of the
goods;
c. The transferee should have a legal right to use the goods
consequently all legal consequences of such use including any
permissions or licenses required therefor should be 'available to
D the transferee;
d. For the period during which the transferee has such legal right,
it has to be the exclusion to the transferor this is the necessary
concomitant of the plain language of the statute viz. a "transfer
of the right to use" and not merely a licence to use the goods;
E
e. Having transferred the right to use the goods during the period
for which it is to be transferred, the owner cannot again transfer
the same rights to others.

In my opinion, none of these attributes are present in the relationship
F between a telecom service provider and a consumer 6f such services. On the
contrary, the transaction is a transaction of rendition of service. . .

PRE-ENACTING HISTORY

I~ the present case, the history as it prevailed before 46th Amendment
G is as follows:
The liability to sales tax of the goods involved in composite works
..
contract fell for determination before this Court in The State of Madras v.
Gannon Dunkerley & Co., (Madras) Ltd, [1959] SCR 379. This Court ruled
at page 413
H
.~.

SHARAT SANCHARNIGAM LTD v. U.OJ. [LAKSHMANAN, J,] 867
;> "If the words 'sale of goods' have to be interpreted in their legal A
" sense, that sense can only be what it has in 'the law relating to sale
of goods,''

Since this judgment has been elaborately considered in the main
judgment, I am not reproducing the_ ~erdict of this Court occurring at page
nos. 41'3, 425, 426 & 427. B
The same Constitution Bench in Mithan Lal v. The State of Delhi and
..... Ailr., [1959) SCR 445 at 451 ruled that
')/

··:j "It would, therefore, be competent to Parliament to impose tax on the
supply. of materials in. building contracts and to impose it under the c
name of sales tax, as. has been d()ne by the Parliament of the
,Commonwealth of Australia or by the-Legislatures of the American
States."

ENACTING HISTORY: .
D
\
As to the meaning of 'enacting history', we can usefully refer to page
no. 520 of the Fourth Edition of Francis Bennion Statutory Interpretation.
' "The enacting history of an Act is the surrounding corpus of public
knowledge relative to its introduction into Parliament as a Bill, subsequent
progress through and ultimate passing by, Parliament. In particular it is the E
extrinsic material assumed to be within the contemplation of Parliament when
- it passed the Act. A text constituting an item of its enacting history may or
may not be expressly mentioned .in the Act. If inspected, it is unlikely to be
~~If-explanatory. On the contrary it will probably require skilled evaluation."

The Statement of Objects and Reasons appended to the Constitution
F
-_,
(Forty-sixth Amendment) Bill 1981 is part of enacting history.

The Statement of Objects and Reasons for the 46th Amendment is,
inter alia;- as follows:

"By a series of subsequent decisions, the Supreme Court has, on the
G
basis of the decision in Gannon Dunkerley's case held various other

--- transactions which resemble, in subs~ance, transaction by way of sales, to be
not liable to sales tax. As a result of these decisions, a transaction, in order
to be subject to the levy of sales tax under entry 92A of the Union List or

- Q entry 54 of the State List, should have the following ingredients, namely, H
J.

SUPREME COURT REPORTS [2006] 2 S.C.R.
868
A parties competent to contract, mutual assent and transfer of property in
goods from one of the parties to the contract to the other party thereto for
a price.

This position has resulted in scope for avoidance of tax in various
ways. An example of this is the practice of inter-State consignment transfers,
B i.e. transfer of goods from head office of a principal in one State to a branch
or agent in another State or vice versa or transfer of goods on consignment
account, to avoid the payment of sales tax on inter-State sales under the
Central Sales Tax Act. While in the case of a works contract, if the contract,
treats the sale of material separately from the cost of the labour, the sale of
C materials would be taxable but in the case of an indivisible works contract,
it is not possible to levy sales tax on the transfer of property in the goods
involved in the execution of such contract as it has been held that there is no
sale of the materials as such and the property in them does not pass as
movables."

D The Parliament had to intervene as the power to levy tax on goods
involved in works contract should appropriately be vested in the State
legislatures as was pointed out in Gannon and Dunkerly & Co., the passages
quoted hereinabove. There were 5 transactions in which, following the
principles laid down in Gann.<,>n,_Dunkerly & Co. relating to works contract,
this Court ruled that those transactions are not exigiable to sales tax under
E various State enactments. The Parliament, therefore, in exercise of its
constituent power, by 46th Amendment, introduced Article 366 (29A). The
Statement of Objects and Reasons has fully set out the circumstances under
which 46th Amendment was necessitated.

F The Amendment introduced fiction by which six instances of transactions
were treated as deemed sale of goods and that the said definition as to
deemed sales will have to be read in every provision of the Constitution
wherever the phrase 'tax on sale or purchase of goods' occurs. This definition
.-
changed the law declared in the ruling in Gannon Dunkerly & Co. only with
regard to those transactions of deemed sales. In other respects, law declared
G by this Court is not neutralized. Each one of the sub-clauses of Article
366(29A) introduced by the 46th Amendment was a result of ruling of this
Court which was sought to be neutralized or modified. Sub clause (a) is the
outcome of New India Sugar Mills v. Commnr. Of Sales Tax 14 STC 316 =
[1963] Suppl. 2 SCR 459 and Vishnu Agencies v. Commissioner of Sales tax
H AIR (1978) SC 449. Sub clause (b) is the result of Gannon Dunerly & Co.,
BHARATSANCHARNIGAMLTDv. U.0.1. [LAKSHMANAN,J.] 869
[1959] SCR 379. Sub clause (c) is the result of K.L. Johar and Company v. A
C.T.O., [1965] 2 SCR 112. Sub clause (d) is consequent to A. V. Meiyyappan
v. CIT 20 STC 115 (Madras High Court). Sub clause (e) is the result of Jt.
Commercial Tax Officer v. YMIA, [1970] I SCC 462. Sub clause (t) is the
result of Northern India Caters (India) Ltd. v. Lt. Governor of Delhi [1978]
4 SCC 36 and State of H.P. v. Associated Hotels of India Ltd., 29 STC 474 = B
1912 (I)sec 472.

In the background of the above, the history prevailing at the time of the
46th Amendment and pre-enacting history as seen in the Statement of Objects
and Reasons, Article 366 (29A) has to be interpreted. Each fiction by which
those six transactions which are not otherwise sales are deemed to be sales C
independently operates only in that sub clause.

While the true scope of the amendment may be appreciated by overall
reading of the entirety of Article 366 (29A), deemed sale under each particular
sub clause has to be determined only within the parameters of the provisions
in that sub clause. One sub clause cannot be projected into another sub clause D
and fiction upon fiction is not permissible. As to the interpretation of fiction,
particularly in the sales tax legislation, the principle has been authoritatively
laid down in the Bengal Immunity Company Ltd. v. State of Bihar and Ors.,
[1955] 2 SCR 603 at 647.

"The operative provisions of the several parts of Article 286, namely, E
clause {l){a), clause {l)(b), clause (2) and clause (3) are manifestly
· intended to deal with different topics and, therefore, one cannot be
projected or read into another." (S.R. Das, J.)"

We can also see page nos. 720 and 721 (P.N. Bhagwati, J.)
F
--1 NATURE OF TRANSACTION IN THE PRESENT CASE:

The contract between the telecom service provider and the subscriber
is merely to receive, transmit and deliver messages of the subscriber through
a complex system of fibre optics, satellite and cables.
G
Briefly, the subscriber originates/generates his voice message through
the handset. The transmitter in the handset converts the voice into radio
waves within the frequency band allotted to the Petitioners. The radio waves
are transmitted to the switching apparatus in the local exchange and thereafter
after verifying the authenticity of the subscriber; the message is transmitted
H
870 SUPREME-. COURT REPORTS [2006] 2 S.C.R.

A to the telephone exchange of the called party and then to the nearest Base
Transceiver Station (BTS). The BTS transmits the signal to the receiver
apparatus of the called subscriber, which converts the signals into voice,
which the subscriber can hear.

The modem legislature makes laws to govern a society, which is fast-
B moving. It is aware of the changing concepts of the emerging times. The law
adapts itself to social, economic, political, scientific and other revolutionary
changes.

Traditionally, a contract for carriage of goods or passengers is by
C roadways, railways, airways and waterways. This is associated with carriage
of tangible goods. Such a carrier has no right over the goods of the customer
and does not effect transfer of right to use any goods used by the carrier for
goods. On this analogy, the Petitioners carry messages. They are only carriers
and have neither property in the message nor effects any transfer to the
. ~ubscriber~ The advancement of technology should be so absorbed in the
D interpretation that this method of carriage of message should also be understood
as. carriage .of goods and not a transfer of a right to use goods, if any.

The licence clearly manifests that it is one for providing
telecommunication service and not for supply of any goods or transfer of
right to use any goods. It expressly prohibits transfer or assignment. The
E integrity of licence cannot be broken into pieces nor can the telecommunication
service rendered by them be so mutilated. Not only this position flows from
the t~~s. of contract, this also flows from Section 4 of the Indian Telegraph
Act which provides for grant of licence on such conditions and in consideration
of such payments as it thinks fit, to any person "to establish, maintain or
F work at telegraph". The integrity of establishing, maintaining and working is
not to be mutilated.

Clause 9 clearly interdicts the licensee provided that licensee will not
.
-

assign or transfer his rights in any manner whatsoever under the licence to
third party. It is impossible to contend that the right to use goods, assuming
G without conceding that they are goods, which are essential for the rendition
of service can never be a transaction or transfer of right to use goods. Nor
can the contract between subscribers and licensee viz. service provider be
interpreted as involving transfer of right to use goods:

Gannon Dunkerly declared that a transaction of sale of goods has to be
H under a contract i.e. it is consensual.
A.

BHARATSANCHARNIGAMLTDv. U.O.L [LAKSHMANAN,J.] 871
Section 4 of the Telegraph Act maintains the integrity of subject-matter A

- of the licence viz., "establish, maintain or work ·a telegraph". Therefore, the
transaction of service is composite one riot capable of disintegrated. Except
in sub-clause (a) in all other sub clauses the transactions are contractual.
There is no scope for importing any doctrine of statutory agency of the
service provider. Except in the case of sub clause (a) where the transfer B
otherwise than in pursuance of contract of property in any goods is deemed
to be sale in each one of the other sub clauses the transaction is consensual.
The contrast between sub Article (a) and all other sub clauses clearly manifests
that the transaction involved in the present dispute are contractual. The fiction
operates to deem what is hot otherwise a sale of goods as a sale of goods i.e.
even the transfer of a right to use goods is deemed to be a sale of the goods. C

It is not possible to interpret the contract between the service provider
and the subscriber that the consensus- was to mutilate the integrity of contract
as a transfer of right to use goods and rendering service. Such a mutilation
is not possible except in the case of deemed sale falling under sub clause (b).
Nor can the service element be disregarded and the entirety of the transaction D
be treated as a sale of goods (even when it is assumed that there is any goods
\
at all involved) except when it falls under sub clause (f). This will also result
in an anomaly of the entire payment by the subscriber to the service provider
being for alleged transfer of a right to use goods and no payment at all for
service. The licence granted by the Central Government fixes the tariff rates E
and all are for services.

Sale of Goods Act, comprehends two elements, one is a sale and the
other is delivery of goods. 20th Century Finance Corporation Limited v.
State of Maharashtra, [2000] 6 SCC i2 at 44, ruled that "

(c) where the goods are available for the transfer of right to use the F
---J - \
taxable event on the transfer of right to use any goods is on the
transfer which results in right to use and the situs of sale would be
the place where the contract is executed and not where the goods are
located for use.

(d) In cases where goods are not in existence or where there is an oral
G
or implied transfer of the right to use goods, such transactions may
be effected by the delivery of the goods. In such cases the taxable
event would be on the delivery of goods."

It is, therefore, unnecessary to deal with the question of delivery of H
872 SUPREME COURT REPORTS (2006) 2 S.C.R.

A possession which is related only to situs and not to subject-matter of taxation ... ,
which is a transfer of right to use goods. In the present case, as no goods
element are involved, the transaction is purely one of service. There is no
transfer of right to use the goods at all.

I am, therefore, of the view that the imposition of sales tax on any
B facilities of the telecommunication services is untenable in law.
ORDER

Leave granted in the special leave petitions.

C Civil Appeals are disposed of in terms of the judgment delivered by us
today in W.P. (C) No. 183/2003 etc. titled-Bharat Sanchar Nigam Ltd v.
Union of India and Ors.,

Contempt Petn. No. 365/&., :.• WP(C) No. 183103.

Contempt petition is dismissed.

K.G. Writ Petition and Civil Appeals disposed of
Contempt petition dismissed.

I -