Holding

The Supreme Court held that the Department of Telecommunications is a dealer under Section 2(c) of the Uttar Pradesh Trade Tax Act and that its rentals constitute a taxable transfer of the right to use goods, so the State’s trade tax assessment is valid.

Summary

The State of Uttar Pradesh appealed against the High Court’s order that the Department of Telecommunications (DoT) was not liable to Uttar Pradesh Trade Tax on rentals collected from telephone subscribers. The Supreme Court examined whether the DoT qualifies as a "dealer" under Section 2(c) of the Uttar Pradesh Trade Tax Act, 1948, and whether the rentals constitute a "transfer of the right to use any goods" within the meaning of the extended definition of "sale" in Section 2(h) and Article 366(29‑A) of the Constitution. The Court held that the DoT, though a government department, is a dealer because it supplies telephone instruments, accessories and connection rights for consideration, and that such supply is a transfer of the right to use goods, making the rentals taxable under Section 3‑F. Consequently, the State’s legislative competence to levy the tax was affirmed, and the earlier judgments were set aside. The DoT was ordered to file returns and the assessment was reinstated.

Issues considered

Whether rentals collected by the Department of Telecommunications are assessable to tax under the Uttar Pradesh Trade Tax Act, 1948.
Whether the DoT qualifies as a "dealer" within the meaning of Section 2(c) of the Act.
Whether Section 3‑F applies only to works contracts or also to rentals for telephone connections.
Whether the State has legislative competence to levy trade tax despite the existence of service tax under the Finance Acts.
Whether Article 285(1) of the Constitution bars a tax on Union property in this context.
Whether the provision of telephone service amounts to a transfer of the right to use goods or merely a service.
Whether a composite contract of service and supply of goods can be dissected for tax purposes.

Legislation cited

Central Sales Tax Act, 1956s. 14, s. 15
Constitution of Indias. Article 285(1), s. Article 366(29-A)
Finance Act, 1994s. Section 65, s. Section 66
Finance Act, 1997
Indian Telegraph Act, 1885
Uttar Pradesh Trade Tax Act, 1948s. 2(aa), s. 2(c), s. 2(d), s. 2(h), s. 3, s. 3-F

Subjects

Trade taxDealer definitionTransfer of right to useTelephone serviceComposite contractService taxConstitutional competenceUttar Pradesh Trade Tax ActIndian Telegraph Act

Judgment

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

FEBRUARY 4, 2003

[SYED SHAH MOHAMMED QUADRI AND K.G. B
BALAKRISHNAN,JJ.]

U.P. Trade Tax Act, 1948-Section 2(aa), (c), (d), (h) and section 3, 3-
F (as amended by U.P. Act 31of1995)-Rentals collected by Department of
Telecommunication (DoT) from subscribers of telephone-Assessibility to tax- C
Held, rentals assessable to tax since DoT is dealer as defined in Section 2(c),
it collects rentals for supply of transfer of use of telephone connection which
is a service, supply of telephone satisfies the requirement of transfer the right
to use the goods within the meaning ofsale in Section 2(h) and it also receives
consideration-Constitution of India, 1950-Article 366 clause 29-A. D
Words and Phrases:

Meaning of-Term 'goods' in the context of Section 2(d) of the U.P.
Trade Tax Act, 1948.
E
The question which arose for consideration in these appeals was
whether the rentals collected by the Department of Telecommunications
(DoT) from the subscribers of telephone in the State could be assessed to
tax under the Uttar Pradesh Trade Tax Act, 1948.

Appellant-State contended that High Court erred in holding that F
DoT is not a 'dealer' within the meaning of the Act; that section 3-F
applies to work contracts only and not to the rental charges collected by
DoT, and that there is no legislative competence in the State to levy trade
tax as the Parliament authorized imposition of service tax under the
Finance Act 1994 on the use of the telephone service by the subscribers; G
that by U.P. Act 31 of 1995 sub-clauses (vii) and (viii) to section 2 (c) of
the U.P. Act were added in the definition of the term 'dealer' to remove
difficulties in the assessment of tax in the transaction relating to transfer
of a right to use any goods; that addition of sub-clause (viii) in the
definition of 'dealer' did not mean that prior to 1995, in various
785 H
786 SUPREME COURT REPORTS [2003] I S.C.R.

A Ordinances and the U.P. Act, having regard to the extended definition of
'sale' did not include a person or a government 'transferring the right to
use any goods' within the meaning of 'dealer'; that if 'DoT', whether in
the courst> of business or otherwise, transferred a right to use any goods,

B
it was covered by the definition of 'dealer' even before the 1995
amendment inserted sub-clause (viii) in Section 2(c) and that position
..
continued even thereafter; that in supplying instruments, accompaniments
and the telephone connection to a subscriber, the DoT is transferring the
rights to use those goods; that providing a telephone to a subscriber was
a service, and 'transfer of the right to use the instrument, appliances and
the whole exchange system was involved; and that in a composite contract,
C the dominant object test will have to be applied.

Respondents-DoT contended that the DoT would not fall within the
definition of 'dealer' un.der the U.P. Act; that the activity of providing
telephone service is not 'the fransfer of right to use the goods' so as to
attract liability under the U.P. Act; that in a contract providing telephone
D by the DoT the service and sale-transfer of the right to use the goods-
are so inter-twined that the rentals cannot be attributed to one or the
other part and, therefore, such a composite contract cannot be dissected
so as to attribute one part of the rentals to service and the other part to
the transfer of the right to use the goods and accordingly assess that part
E of rentals to tax; that as there was no such provision to tax service in
sub-clause (d) of clause 29-A no tax could be levied by the State; and that
it is providing a service which does not involve transfer of a right to use
any goods and that by the Finance Act, 1997, Parliament has imposed
service tax, as such the State cannot levy any tax under the Act.

·p Intervenor contended that the contract of the subscribers with the
DoT for installation of telephone was an indivisible contract for providing ~
service which cannot be split into two separate contracts- one for transfer
of the right to use any goods and the other for the service provided; that
under the Indian Telegraph Act, 1885 and the Rules no agreement can be
spelt out to transfer the right to use any goods by the DoT to the
G subscriber; that supply of goods, if any, was incidental to the performance
of contract of service; and that the instrument could be used only when
access to the whole system is provided by DoT and that when the contract
was a composite contract involving service and the transfer of the right __.
to use any goods, in the absence of any provision in the Constitution
H enabling the State to levy tax for service separately, no tax could be
STATE OF U.P. v. U.0.1. 787
levied and collected under the Act. A
j.. Allowing the appeal, the Court

HELD: I. I. Under Section 2 (c) of the Uttar Pradesh Trade Tax
Act, 1948 the word 'dealer' means a person who (whether regularly or
' otherwise) carries on the business in U.P. and includes, inter alia, a B
government which (whether in the course of business or otherwise)
undertakes buying, selling, supplying or distributing goods directly or
..... indirectly for cash or deferred payment or for commission, remuneration
or other valuable consideration [sub-clause (iv)I. The word 'buy' is not
defined. It is antonym of 'sell' and has to be construed in the light of the
definition of 'sale' in clause (h) of Section 2(c) (viii). It is an inclusive c

- -+
definition. It means any transfer of property in goods and includes among
other transactions, a transfer of the right to use any goods for any purpose
(whether or not for a specified period), for cash, deferred payment or
other valuable consideration. Thus,. in regard to a transfer of the right to
use any goods both a person and a government will be within the ambit D
of the definition of 'dealer' subject to the following distinction: a person
to be a 'dealer' should carry on the business of buying, selling etc., whether
regularly or otherwise, but a government which buys, sells etc. (whether
in the course of business or otherwise) will be a 'dealer' for purposes of the
JJ.P. Act. Inasmuch as the definition of 'sale' includes any transfer of
property in the goods and a transfer of the right to use any goods for any E
purpose, the DoT which engages in transfer of right to use any goods will
be a 'dealer' within the meaning of sub-clause (iv) of clause (c) of Section
2 of the U.P. Act. [798-C-FJ

Mis. Vraj/al Manila/ and Co. and Anr. v. State of MP., [1996[ Supp.
sec 201, referred to. F
:A

1.2. After insertion of clause 29-A in Article 366 of the Constitution
and consequential amendments of the term 'sale' in the Act, if 'sale' is
construed in· the sense it was understood before the said amendments, it
will be a clear negation of the constitutional and statutory provisions, G
therefore, such a contention cannot be accepted. Before insertion of sub-
clause (viii) In Section 2(c) of the Act, the activity of a transfer of the
right to use any goods fell within the meaning of 'sale' in clause (h) so the
1
DoT while so doing could not but be a 'dealer' within the meaning of
Section 2(c) of the Act. If that was the position before the enactment of
U.P. Act 31 of 1995 which inserted, inter alia, sub-clause (viii), then H
788 SUPREME COURT REPORTS (2003] I S.C.R.

A unless a contrary intention appears from the amended provisions, the
pre-amendment position shall continue. Had the intention of the legislature
been to change th&t position and exclude 'a government' from the
definition of 'dealer' in regard to a transfer of the right to use the goods,
it would have said so specifically. It follows that in view of the extended
meaning or'sale of goods, the DoT would continue to be within the ambit
.
B of a 'dealer' under the U.P. Act even in regard to transfer of a right to
use any goods after insertion of sub-clause (viii) in clause (c) of Section 2
by U.P. Act 31 of 1995. The reasoning of the High Court that in view of
amendment of Section 2(c) in 1995, adding sub-clause (viii), sub-clause
(vi) had to be interpreted differently so as to exclude the DoT from the
C meaning of dealer and also the contention of the respondent-DoT cannot
be accepted. Therefore, insertion of sub-clauses (vii) and (viii) in clause
(c) of Section 2 was by way of abundant caution. This is not an unusual
feature of the legislation. [800-D-H; 801-A)

The Wakefield Local Board of Health v. The West Riding and Grimsby
D Railway Company, LR (1865) QB 84 and Re: Sir Stuart Samuel, (19131
Appeal Cases 514, referred to.
- "
Raj Bahadur Kanwar Raj Nath and Ors. v. Pramod C. Bhatt, Custodian
ofEvacuee Property, [1955] 2 SCR 977 and Bhikoba Shankar Dhumal (dead)
by Lrs. and Ors. v. Mohan Lal Punchand Tathed and Ors., (1982) l SCC 680,
E referred to.

1.3. The term 'goods' is defined in very wide terms so as to bring in
both tangible and intangible objects. Telephone instruments and other
movables, including wiring, cable etc. are undoubtedly goods. However,
F the position of telephone exchange was not without demur on the ground
that they were housed in immovable properties. That objection need not
detain this Court because intangible object, like electricity which is
generated in projects and transmitted through sub -stations, housed in
buildings, has been held to be goods. Therefore, the teleph_one connection
and all other accessories which give access to the telephone exchange
G with or without instruments are 'goods' within the meaning of Section
2(d) of the U.P. Act. [802-F, H; 803-A-DJ

Commissioner ofSales Tax, Madhya Pradesh, Indore v. Madhya Pradesh
Electricity Board, Jabalpur, [1969) 1 SCC 200 and State of A.P. etc. v.
National Thermal Power Corpn. Ltd. and Ors. etc., [20021 5 SCC 203, referred
H to.
STATE OF U.P. v. U.0.1. 789

Mekinley Telephone Company v. Cumberland Telephone Company, 152 A
Wis, 359; 140 N.W. 38; 1913 Wisc. Lexis 77, referred to.
)t

1.4. The submission that any activity in the nature of mere service
or profession is excluded from the definition of the term "business" and
as the DoT is providing service, the same cannot be subjected to tax,
though attractive, is devoid of any substance. The definition of a 'dealer' B
takes in ~a Government', when it sells, supplies, etc. whether in the course
of business or otherwise. Therefore, it is not necessary that the activity of
sale, etc. by the DoT should be in the course of business. Even assuming
that the supply of the telephone to a subscriber, being a service, falls
outside the meaning of the term 'business', the DoT would nonetheless be C
liable to pay tax under the U.P. Act as a 'dealer' for the simple reason of
transferring the right to use the telephone instrument/apparatus and the
whole system· as that falls within the extended meaning of 'sale' under
clause (h) of Section 2 of the U.P. Act. Further only such service is
excluded from the definition of the term 'business' which does not involve
the purchase or sale of goods. In the instant case, it cannot be legitimately D
disputed that the service involves installation of instrument and access to
the exchange and telephone system as a whole which has been found to
fall within the meaning of the term 'sale'. Therefore, the second part of
the definition of the term 'business' is of no help to the DoT. [807-A-DJ
E
1.5. When DoT provides telephone service, a number is allotted, an
instrument/apparatus and other appliances are installed at the premises
of a subscriber and the same are connected with the exchange to enable
him to have access to the whole system, to dial and to receive calls. It
makes no difference whether any subscriber replaces instrument of the
DoT with his own instrument because the most important thing is the F
connection of the subscriber's telephone number with the area exchange
and that was provided by the DoT. It needs to be borne in mind that
handing over of the possession or the control of the whole system of
exchange is not sine qua non of completing the transfer of the right to us~
any goods. The submission that the area telephone exchange and other G
systems would remain under the control of the DoT, are irrelevant to
complete such a transfer. Even otherwise, after installation of the
instrument and other appliances, once the DoT connects the telephone
line of the assigned number of the subscriber to the area exchange, access
to other telephones is established. There cannot be denial of the fact that
giving such an access would complete the transfer of the right to use the H
790 SUPREME COURT REPORTS [2003) I S.C.R.

A goods. 1807-F-H; 808-A-C)
20th Cent111y Finance Corporation ltd. and Anr. v. State of Maharashtra, ~
1200016 SCC 12 and Rashtriya !spat Nigam Ltd. v. Commercial Tax'Officer,
(1990) 77 STC 182 and State of Andhra Pradesh and Anr. v.:Rashtriya !spat
Nigam Ltd., 120021 126 STC 114, referred to.
B
1.6. No provision of the U.P. Act or the said Finance Act, 1994 or
the Constitution is brought to the notice to hold that rentafs collected by
the DoT from the subscriber cannot be subjected to tax as is done under
.the U.P. Act. Merely because service tax is imposed by the Parliament
C under the Finance Act in respect of telephone connection to a subscriber
is no ground to hold that the State cannot levy tax under the U.P. Act.
Therefore, providing telephone service by the DoT which comprises of
allotment of number, installation of an instrument/apparatus and other
appliances at the premises of a subscriber, which are connected with a
telephone line to the area exchange to enable him to have access to the
D whole system, to dial and to receive calls, in effect, falls within the meaning
of the extended definition of 'sale', viz., within the meaning of 'the transfer
of the right to use any goods' and the fact that it is described as service
under the ITA 1885 and the Rules made thereunder or under the Finance
Act, 1994 would not militate against the same being a 'sale' within the
meaning of the U.P. Act. (808-F-H; 809-A, B)
E
1.7. In the case of a composite contract, where the service is the
dominant object of the contract, the supply of goods is incidental to the
enjoyment of the service, it is not possible to separate service from the
supply of goods. In regard to sale of goods where the service is incidental,
F the principl~ of non-separability will apply in the absence of a specific
valid statutory provision; and it would not be permissible to treat such
service as a transfer of right to use the purpose of taxation under the
relevant Sales Tax Act. Where, however, the supply of service as well as
supply of goods are prominent objectives and they have been clubbed
together under a composite contract, it would be possible to treat them
G separately; though covered under the same contract. (810-B, C, F,_ G, HI •
State of Himachal Pradesh v. Associated Hotels of India Ltd., (1972) 29
STC SC, referred to.
+
British Railways Board v. Customs and Excise Commissioners, Simon's
H Tax Cases, (1977) 221; British Airways Pie v. Customs and Excise
STATE OF U.P. v. U.0.l. 791
Commissioners Si111on Tax r:ase, 11990) 643; Customs and Excise A
Com111issioners v. British Telecommunications Pie Simon Tax Case 11999)
Jf 758, referred to.

1.8. The insertion of clause 29-A in Article 366 of the Constitution
did not altogether obliterate the distinction between sale and service,
except in a case falling under sub-clause {I) thereof. In such a case, the B
transfer, delivery or supply of any goods shall be deemed to be a sale of
those goods by the person making the transfer, delivery or supply is
made. In other respects the distinction between sale and service for
imposing tax is maintained. 1810-D, EJ

1.9. In the instant case, the service of telephone connection cannot C
be artificially split into various categories-supply of instruments and
accompaniment on the one hand and supply of telegraphic line/connection
on the other, to name the former as 'sale' and the latter as 'service'. The
analogy of composite contract will apply where 'sale' and 'service' are
two different independent objects. Inasmuch as it is found that the DoT D
is a 'dealer' as defined in Section 2{c) of the U.P. Act and it collects
rentals for the supply of transfer of use of telephone connection, which is
compendiously called 'service' and that the supply of telephone satisfies
the requirements of a transfer of the right to use the goods within the
meaning of 'sale' in Section 2(h); it also receives consideration, therefore,
the requirements of charging under Section 3 read with Section 3(1) are E
satisfied. 1812-C-FI

Union qf India and Ors. v. Secretary, Revenue Department, (CTI/),
Government of Andhra Pradesh and Ors., {1999) 113 STC 203 and Union of
India and Anr. v. State of Haryana and Anr., [2001 I 123 STC 539, F
disapproved.

Mis. Northern India Caterers (India) Ltd v. Lt. Governor of Delhi,
1198012 SCC 167; The Senior Electric Inspector and Ors. v. Laxmi Narayan
Chopra and Ors., 11962) 3 SCR 146; State of Bihar v. Mangat Sao, [1963)
1 SCR 148; Delhi Science Forum and Ors. etc. v. Union of India and Anr. G
etc., 11996] 2 SCC 405 and The State of Punjab v. Mis. Associated Hotels of
India Ltd, [1972) 1 SCC 472, referred to.

CIVIL APPEi.LA TE JURISDICTION : Civil Appeal No. 5781 of
1999.
H
792 SUPREME COURT REPORTS [2003] I S.C.R.

A From the Judgment and Order dated 13.9.1999 of the High Court of
U.P. in W.P. 115 of 1995.

WITH

C.A. Nos. 5782-92/99, 3283-3286, 3530-3533, 3705, 3706, 3757, 4336,
B 4107/2000, 3778-3780, 5886 of 2000, C.A. Nos. 877-937/2003.

Sunil Gupta. S. Ganesh, T.L.V. Iyer, Ashok H. Desai, Joseph Vellapally,
R.C. Verma, Mukesh Verma, Vivek Vishnoi, Punit Dutt Tyagi, Ms. Vibha
Mahajan Seth, A. Subba Rao, Tara Chandra Sharma, Hemant Sharma, Y.P.
Mahajan, P. Parmeswaran, Ramesh Babu, M.R., K.R. Sasiprabhu, Rajesh
C Kumar, Manjul Bajpai, Ms. Bina Gupta, Ms. Vanita Bhargava, Ms. Divya
Roy Jha and Ms. Garima Dewan for the appearing parties.

The Judgment of the Court was delivered by

SYED SHAH MOHAMMED QUADRI, J. The State ofUttar Pradesh
D and the Sales Tax Officer (referred to in this judgment as, 'the State') are in
appeal against the common judgment of a Division Bench of the High Court
of Judicature at Allahabad in Writ Petition No.115 of 1995 Union of India
and Anr. v. State of UP. and Anr. and batch dated September 1, 1998.

The State, being of the opinion that the second respondent (The Manager,
E Department of Telecommunications, of the first respondent hereinafter
collectively referred to as the 'DoT') failed to file return of the turnover of
the rentals collected from the subscribers for .'the transfer of right to use' the
telephone system during the year 1988, under the provisions of the Uttar
Pradesh Trade Tax Act, 1948 (for short, 'the U.P. Act'), called upon the
F 'DoT to file return therefor. However, no return was filed by the DoT. The
State assessed the tax payable by the DoT in exercise of the power conferred
under sub-section (3) of Section 7 of the U.P. Act. The DoT challenged the
validity of the orders of assessment in the writ petitions before the High
Court on various grounds. The State pleaded justification fo; passing the
order of assessment in view of the extended definition of the expression 'Tax
G on the sale or purchase of goods' in clause 29-A ** of Article 366 of the
Constitution of India and the relevant provisions of the-' U.P. Act. The High
Court, by the impugned judgment and order, allowed the writ petitions taking
the view that (i) the DoT (Union of India) is not a 'dealer' within the m.eaning
* [Reported in [1999) 114 STC 288)
H• By the Constitution (forty-sixth Amendment) Act. 1982]
STATE OF U.P. v. U.O.l. [SYED SHAH MOHAMMED QUADRI, J.] 793

of the Act; (ii) Section 3-F of the Act applies to work contracts only and not A
to the rental charges collected by the DoT; (iii) there is no legislative
competence in the State to levy Trade Tax in view of the fact that the
Parliament authorised imposition of service tax under the Finance Act, I 994
O!l the use of the telephone service by the subscribers; (iv) Article 285(1) of
the Con~titution of lndia prohibits the State from imposing any tax on the
property of the Union of India; and (v) in providing telephone service through B
the DoT, Union of India is discharging its sovereign function which cannot
be subjected to trade tax.

Mr. Sunil Gupta, the learned senior counsel appearing for the appellants-
State, assailed the validity of the reasoning and conclusions of the High C
Court on all the points, referred to above.

Mr. Mukul Rohtagi, the learned Additional Solicitor General, appearing
for the respondents-DoT, conceded in our view rightly, that he would not be
supporting the judgment of the High Court on the grounds (iv) and (v)
mentioned above. But he contended, rather vehemently, that the DoT would
not fall within the definition of 'dealer' under the U.P. Act and that the D
activity of providing telephone service would not answer the definition of
'the transfer of right to use the goods' and, therefore, the High Court rightly
quashed the impugned orders of assessment.

Mr. Joseph Vellapally, the learned senior counsel appearing for the E
intervenor contended that the contract of the subscribers with the DoT for
installation of telephone was an indivisible contract for providing service
which cannot be split into two separate contracts - one for transfer of the
right to use any goods and the other for the service provided. He elaborated
the contention by pointing out that under the Indian Telegraph Act, 1885 and
the Rules made thereunder, no agreement can be spelt out to transfer the F
right to use any goods by the DoT to the subscriber. In any event, submitted
the learned senior counsel, supply of goods, if any, was incidental to the
performance of the contract of service. Relying on the decision of this Court
in The State of Punjab v. Mis. Associated Hotels of India Ltd [I 972] I SCC
472 he argued that such composite contracts are indivisible as the parties G
never contracted to sell/supply any goods; such incidental sale/supply, being
merely concomitant of the performance of the service contracted for, would
equally apply to a telephone service contract which incidentally involved
supply of instrument. He further contended that in providing telephone service,
it could not be said that the right to use the whole system of the telephone
exchange was transferred as the possession and control of the whole system H
794 SUPREME COl/RT REPORTS [2003) I S.C.R.

A was being shared by all the subscribers and it remained in the possession and ,
under the control of the DoT.

The short but question of substantial importance arises for consideration:
can rentals collected by the DoT from the subscribers of telephone in the
State, be assessed to tax under the U.P. Act?
B
There can be no dispute that Entry 54 of List II of the 7th Schedule to
the Constitution of India authorises a State to impose tax on the sale or
..
purchase of goods other than newspapers, subject of course, to the provisions
only of Entry 92-A of List I which deals with taxes on sale or purchase of
C goods where such sale or purchase takes place in the course of inter-State
trade or commerce. However, levy of tax on the sale or purchase of newspapers
is not within the legislative competence of either the State or the Union. The
expression 'Tax on the sale or purchase of goods' is given extended meaning
by inserting clause 29-A in Article 366 of the Constitution, which, to the
extent relevant, reads as under :
D "29A. 'Tax on the sale or purchase of goods' includes -

(a) to (c) xxx xxx xxx
y-
(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
E other valuable consideration;

(e) to (t) xxx xxx xxx"

After insertion of the aforementioned clause in regard to tax on the sale or
purchase of goods, the State Acts, including the U.P. Act, were amended to
F fall in line with the above definition.

The charging section in the U.P. Act is Section 3, which, insofar as it
is relevant for our purposes, is quoted here under :

"Section 3 - Liability to tax under the Act- (I) Subject to the provisions
G of this Act, every dealer shall for each assessment year, pay a tax at
the rates provided by or under Section 3-A or Section 3-0 on his
turnover of sales or purchases or both, as the case may be, which
shall be determined in such manner as may be prescribed."

The liability under Section 3 is on every dealer, for each assessment year, to
H pay a tax at the rates provided by or under various sections of the U.P. Act.
STATE OF U.P. v. U.0.1. [SYED SHAH MOHAMMED QUADRI. J.] 795

Here, it would be useful to refer to Section 3-F which, inter a/ia, prescribes A
rate of tax on 'transfer of the right to use any goods':

''3-F. Tax on the right to use any goods or goods involved in the
execution of works contract - (Notwithstanding anything contained in
Section 3-A or Section 3-AAA or Section 3-D but subject to the
provisions of Sections 14 and 15 of the Central Sales Tax Act, 1956, B
every dealer shall, for each assessment year, pay a tax on the net
•
turnover of -

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

(b) t ansfer of property in goods (whether as goods or in some other
form) involved in the execution of a works contract,

at such rate not exceeding [twenty per cent] as the State Government
may, by notification, declare and different rates may be declared for D
different goods or different classes of dealers.

(2) For the purposes of determining the net turnover referred to in
sub-section (I), the following amounts shall be deducted from the
total amount received or receivable by a dealer in respect of a - E
(a) transfer referred to in clause (a) of sub-section (1) whether such
transfer was agreed to during that assessment year or earlier. -

(i) to (iii) xxx xxx xxx

(b) xxx xxx xxx" F

A perusal of the provision, extracted above, shows that sub-section (I) of
Section 3F commences with a non-obstante clause, excludes the operation of
Section 3A, Section 3-AAA and Section 3-D but is subject to the provisions
of Sections 14 and 15 of the Central Sales Tax Act, 1956. It imposes on
every dealer, for each assessment year, the liability to pay a tax inter a/ia, on G
the net turnover of transfer of 'the right to use any goods', for any purpose,
whether or not for a specified period, for cash, deferred payment or other
valuable consideration at such rate, as may be prescribed by the State

•substiluted by U.P. Act No. 31of1985 w.e.f. 13.9.1985. H
796 SUPREME COURT REPORTS [2003] I S.C.R.

A Government. The prescribed rate cannot exceed twenty five per cent but the
State Government may, by notification, declare different rates for different
goods or different classes of dealers. The net turnover in respect of a transfer
referred to in clause (a) of sub-section (I), has to be determined after making
deductions enumerated in sub-section (2) read with Rule 44C of the Tax
B Rules, Unfortunately, the High Court failed to notice Section 3F in its entirety
and erred in confining it only to 'goods involved in the execution of works
contract'.

For understanding the true impo1t of the aforementioned provisions, it
would be appropriate to notice the definitions of the terms 'business', 'dealer',
C 'goods', and 'sale' defined in clauses (aa), (c), (d) and (h) respectively, of
Section 2 ·of the U.P. Act, which read as under:
t
"(aa)'business', in relation to business of buying or selling goods,
includes -
'\
D (i) xxx xxx xxx )'
l
'
(ii) the execution of any works contract or the transfer of the
right to use any goods for any purpose (whether or not
v-
for a specified period. . '

E (iii) xxx xxx xxx

but does not include any activity in the nature of mere service
or profession which does not involve the purchase or sale of
goods."

(c) 'dealer' means any person who carries on in Uttar Pradesh
F
(whether regularly or otherwise) the business of buying, selling,
supplying or distributing goods directly or indirectly, for cash
or deferred payment or for commission, remuneration or other
valuable consideration and includes -

G (i) to (iii) xxx xxx xxx

(iv) a Government which, whether in the course' of business
or otherwise buys, sells, supplies or distributes goods,
directly or otherwise for cash or for deferred payment or
for commission, remuneration or other valuable
H consideration;
STATE OF U.P. v. U.0.1. [SYED SHAH MOHAMMED QUADRI. l.] 797

(v) every person who acts within the State, as an agent of a A
dealer residing outside the State, and buys, sells, supplies
or distributes goods in the State or acts on behalf of such
dealer as -

(a) a mercantile agent as defined in the Sale of Goods Act,
l~O;m B
(b) an agent for handling of goods or documents of title
relating to goods; or

(c) an agent for the collection or the payment of the sale
price of goods or as a guarantor for such collection or C
such payment;

(vi) a firm or a company or other body corporate, the principal
office or headquarters whereof is outside the State having a
branch or office in the State, in respect of purchases or sales,
supplies or distribution of goods through such branch or office. D
(vii) xxx xxx xxx

(viii)every person who carries on business of transfer of the right to
use any goods for any purpose (whether or not for a specified
period) for cash, deferred payment or other valuable E
consideration.

Provided xxx xxx"

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

"(h) 'sale' with its grammatical variations and cognate expressions,
means any transfer of property in goods (otherwise than by way
of a mortgage, hypothecation, charge or pledge) for cash or
deferred payment or other valuable consideration, and include - H
798 SUPREME COURT REPORTS [2003) I S.C.R.

A (i) to (iii) xxx xxx xxx

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

B Inasmuch as under Section 3 read with Section 3F of the U.P. Act the
liability to pay tax, inter alia, on 'the transfer of the right to use any goods'
at the specified rate is on a dealer, as defined in Section 2(c) thereof, extracted
above, we shall examine the scope of the definition to ascertain - is the DoT
a dealer?

C The word 'dealer' means a person who (whether regularly or otherwise)
carries on the business in U.P. and includes, inter a/ia, a government [sub-
clause (iv)] which (whether in the course of business or otherwise) undertakes
buying, selling, supplying or distributing goods directly or indirectly for cash
or deferred payment or for commission, remuneration or other valuable
D consideration. Now it becomes necessary to look into the definition of 'buy'
and 'sell'. The word 'buy' is not defined. It is an antonym of 'sell' and has
to be construed accordingly in the light of the definition of 'sale' in clause
(h), quoted above, It is an inclusive definition. It means any transfer of
property in goods and includes among other transactions, a transfer of the
right to use any goods for any purpose (whether or not for a specified period)
E for cash, deferred payment or other valuable consideration. It is thus clear
that in regard to a transfer of the right to use any goods both a person and
\
a government will be within the ambit of the definition of 'dealer' subject to
the following distinction: A person to be a 'dealer' should carry 011 the
business of buying selling etc., whether regularly or otherwise, but a
F government which buys, sells etc. (whether in the course of business or
otherwise) will be a 'dealer' for purposes of the U.P. Act. Inasmuch as the
definition of 'sale' includes any transfer of property in the goods and a
transfer of the right to use any goods for any purpose, the DoT which engages
in transfer of right to use any goods will be a 'dealer' within the meaning of
sub-clause (iv) of clause (c) of Section 2 of the U.P. Act.
G
In Mis. Vraj/a/ Manila/ and Co. and Anr. v. State of M.P. and Anr.,
[1986] Supp. SCC 201, this Court considered the meaning of Explanation II
to Section 2 ( d) of the Madhya Pradesh General Sales Tax Act, 1959, which
was similar in terms to sub-clause (iv) of clause {c) of Section 2 of the U.P.
Act and held:
H
STATE OF U.P. "· u.o.r. [SYED SHAH MOHAMMED QUADRI. J.] 799

"The language of Explanation II shows that its purpose is to create A
a legal fiction. and that while under the main clause, for a person to
be a dealer. he must carry on the business of buying, selling. supplying
or distributing goods. even if the Central Government or a State
Government or any of their departments or offices does not carry on
such business, if it buys, sells, supplies or distributes goods, it is to B
be deemed to be a dealer for the purposes of the M.P. Sales Tax Act,
that is, for the purposes of the levy and collection of tax unde1· M.P.
Sales Tax Act. After the amendment of clause (d) by the 1971 Act,
it is irrelevant for the purposes of the levy of tax under the M.P. Sales
Tax Act whether the Central Government or a State Government or
any of their departments or offices have bought or sold goods in the C
course of business."

While so, by U.P. Act 31 of 1995, sub-clauses (vii) and (viii) which
deal with 'person' were inserted in clause (c) of Section 2 with effect from
September 3, 1985. Sub-Clause (vii) incorporates business of transfer of
property in goods involved in the execution of a work contract and sub- D
clause (viii) incorporates business of transfer of the right to use any goods for
any purpose.

In the present discussion, we are concerned with the effect of insertion
of sub-clause (viii) in clause (c) of Section 2 on the aforementioned conclusion E
that the DoT is a 'dealer' falling in sub-clause (iv) of the said clause. It was
co"tended by the learned Additional Solicitor General that in sub-clause (iv)
about 'a government,' it was not specifically provided as was done in sub-
clause (viii) in regard to a person, that he must be carrying on the business
of a transfer of the right to use any goods for any purpose; in the absence of
those words in clause (iv), the DoT, even if it transferred a right to use any f
goods for any purpose for rentals, would not fall within the meaning of the
tenn 'dealer'. He urged that every section, every clause and every word in
. a legislation should be given some meaning; it could not be presumed that
. the legislature carried out the exercise in futility in adding sub-clause (viii)
. to Section 2(c). The intention of the legislature, it was submined, in adding
-f · sub-clause (viii) to Section 2(c) was only to make it clear that 'a government' G
would not be a 'dealer' in regard to the extended meaning of 'sale' which
included the transfer of a right to use any goods but only in regard to sale
of goods in its traditional meaning. Mr. Gupta countered that contention by
inviting our anention to the Statement of Objects and Reasons of U.P. Act 31
of 1995 that the sub-clauses (vii) and (viii) were added in the definition of H
800 SUPREME COURT REPORTS [2003) I S.C.R.

A the term 'dealer' to remove difficulties in the assessment of tax in the
transaction relating to tt"ansfer of a right to use any goods. The legislature,
submitted the learned counsel, earlier amended the definition of 'sale' in
Section 2(h) leaving the definition of 'dealer' static but later is was thought
that ex ahtmdanti cautela the definition of 'dealer' might also be amended
B like the definition of'sale' and by U.P. Act No. 31of1995 a new package
of amendmen~ was introduced relating to the transfer of a right to use any
goods by iidding sub-clause (viii) to clause (c) of Section 2. He argued that
addition of sub-clause (viii) in the definition of 'dealer' did not mean that
prior to 1995, in various Ordinances and the U.P. Act, having regard to the
extended definition of 'sale', did not include a person or a government
C 'transferring the right to use any goods' within the meaning of 'dealer.'. It
was emphasised that if 'the DoT', whether in the cou~se of business or
otherwise, transferred a right to use any goods, it was covered by the definition
of 'dealer' even before the 1995 amendment inserted sub-clause (viii) in
clause (c) of Section 2 and that position continued even thereafter.

D We are afraid, we cannot accede to the contentions of the learned
Additional Solicitor General. After insertion of clause 29-A in Article 366 of
\
the Constitution and consequential amendments of the term 'sale' in the U.P.
Act, if 'sale' is construed in the sense it was understood before the said
amendments, it will be a clear negation of the constitutional and statutory
E provisions, therefore, such a contention cannot be accepted. We have already
held above that before insertion of sub-clause (viii) in Section 2(c) of the
U.P. Act, the activity of a transfer of the right to use any goods for any
purpose (whether or not for a specified period) for cash, deferred payment or
other valuable consideration, fell within the meaning of 'sale' in clause (h)
so the DoT while so doing could not. but be a 'dealer' within the meaning of
F Section 2(c) of the U.P. Act. If that was the position before the enactment of
U.P. Act 31 of I 995 which inserted, inter alia, sub-clause (viii), then unless
a contrary intention appears from the amended provisions, in our view, the
pre-amendment position shall continue. Had the intention of the legislature
been to change that position and exclude 'a government' from the definition
G of 'dealer' in regard to a transfer of the right to use the goods, it would have
said so specifically. It follows that in view of the extended meaning of sale
of goods, the DoT would continue to be within the ambit of a 'dealer' under
the U.P. Act even in regard to transfer of a right to. use any goods after
insertion of sub-clause (viii) in clause (c) of Section 2 by U.P. Act 3 I of
1995. We are, therefore, unable to uphold the reasoning of the High Court '
H that in view of amendment of Section 2(c) in 1995, adding sub-clause (viii),
STATE OF U.P. '" U.0.1. [SYED SHAH MOHAMMED QUADRI. J.) 801

sub-clauses (vi) had to be interpreted differently so as to exclude the DoT A
1" from the meaning of'dealer' and also the contention of the learned Additional
Solicitor General. In our view, insertion of sub-claoses (vi) and (vii) in clause
(c) of Section 2 was, as submitted by Mr. Gupta, by way of abundant caution.
This is not an unusual feature of the legislation. As long back as in 1865 in
The Wakefield local Board of Health v. The West Riding and Grimsby Railway B
Company, LR (1865) QB 84, Cockburn, C.J. held:

"I am opinion that the objection raised by the respondents was
untenable. I think the words inserted at the end of the definition in
the interpretation clause, section 3 of the 8 Vict.c.20, were interested,
as Mr. Cleasby argues, from excess of cautfon, in the apprehension C
that ju3tices, if not warned of what the law is, might act although
inserted; and the legislature thought that, if they did not actually
include what would be virtually implied, it might be assumed that it
was excluded."

In Re: Sir Stuart Samuel, (1913) Appeal Cases 514, the Privy Council D
observed:

"It is desirable to notice an argument derived from s.4 of 41
Geo.3,c.52, passed in 180 I. This section disqualifies for a seat in the
Parliament of the United Kingdom any one who makes a contract
with a Commissioner of His Majesty's Treasury in Ireland or with E
any other person whomsoever for or on account of the public service
in Ireland. This was surplusage (such is the argument) if the Act of
1782 had already made such contracts, irrespective of place, a ground
of disqualification for the British Parliament, since all persons
disqualified forthe British Parliament were bys.I of the Act of 1801
already disabled from sitting in the Parliament of the United Kingdom, F
at all events for British constituencies. There are several answers to
this contention. It is not a conclusive argument as to the construction
of an earlier Act to. say that unless it be construed in a particular way
a later enactment would. be surplusage. The later Act may have been
designed, ex ahundante cautela, to remove possible doubts." G
To the same effects are the views expressed by this Court in Raj Bahadur
Kanwar Raj Nath and Ors. v. Pramod C. Bhatt Custodian of Evacuee
Property, [1955] 2 SCR 977:

"The operative portion of the section which confers power on the H
802 SUPREME COURT REPORTS [2003) I S.C.R.

A Custodian to cancel a lease is unqualified and absolute and could not
be abridged by reference to the non-obstante clause which was only
inserted ex abundanti cautela with a view to repel a possible contention
that the section does not by implication repeal statutes conferring
rights on lessees."

B And in Bhikoha Shankar Dhuma/ (dead) by lrs. and Ors. v. Mohan Lal
Punchand Tathed and Ors., [ 1982] I SCC 680. This Court held :

"It appears to us that the .said paragraph was introduced by way of
abundant caution to get over the possible objection raised on the
basis of the decision in the case of Dadarao v. State of Maharashtra.
c AIR (1970) Born. 144. The said paragraph is merely declaratory of
what the true legal position had ahyays been even from the
commencement of the Act. The introduction of an express provision
to the above effect does not have the effect of altering the true legal
position as explained by us above even without the aid of such express
D provision. This becomes further clear from the observations fQund in
the decision of this Court in Raghunath laxman Wani v. State of
Maharashtra, (1971] 3 SCC 391."

It may be that the same amount of precaution was not taken by the
legislature in defining 'dealer' with respect to ' a government, in sub-clause-
E (iv) as was done regarding 'a person' by inserting sub-clauses (vii) and (viii)
in clause (c) of Section 2; but that, in our view, in the light of the above
discussion, would hardly make any difference in construing the provisions of
sub-clause (iv) of clause (c) in Section 2 of the U.P. Act.

Before taking up the other contentions we may conveniently dispose of
F a short point - ambit ofthe definition of the term 'goods' - quoted above. It
is defined in very wide terms so as to bring in both tangible and intangible
objects. It takes in its fold every kind or class of movables, including all ~.
material commodities and articles involved in the execution ofa works contract
and growing crops, grass, trees and things attached to or fastened to anything
G pennanently attached to the earth which under the contract of sale are agreed
to be severed but excluding actionable claims, stocks, shares, securities or
postal stationery sold by the Postal Department. According to the DoT, what
is being supplied as service is a telephone connection with an instrument
which is connected with permanent telephone lines laid up to the subscriber's
place where the telephone system is installed and the same is connected with
H th~ exchange. Telephone instruments and other movables, including wiring,
STATE OF U.P. v. U.0.1. [SYED SHAH MOHAMMED QUADRI. J.] 803

cable etc., are undoubtedly goods. However. the position of telephone exchange A
, was not without demur on the ground that they were housed in immovable
properties. That objection need not detain us because intangible object like
electricity which is generated in projects and transmitted through sub-stations,
housed in buildings, has been held to be goods. In Commis$ioner of Sales
Ta.t, Madhya Pradesh, Indore v. Madhya Pradesh Electricity Board, Jabalpur, B
(1969) I SCC 200, a Bench of three learned Judges of this Court took the
view that the electricity falls within the meaning of 'goods' under the Madhya
Pradesh General Sales Tax Act, 1959. That view was aftinned in a recent
judgment of a Constitution Bench of this Court in State ofA.P. etc. v. National
Thermal Power Corpn. ltd and Ors. etc., (2002) 5 SCC 203 holding that
electricity though on intangible object is 'good] covered by Entry 54 of List C
II of Schedule VII to the Constitution as also Section 2(d) of the Central
Sales Tax Act, 1956. The Supreme Court Wisconsin (U.S.A.) in Mckinley
Telephone Company v. Cumber/ant Telephone Company, (152 Wis. 359;
140 N.W. 38; 1913 Wisc. Lexis 77] held the view that the furnishing of
telephone serv!ce might be classed as the supplying of a commodity
constituting a subject of commerce. We, therefore, have no hesitation in D
holding that telephone connection and all other accessories which give access
to the telephone exchange with or without instruments are "goods' \Vithin the
meaning of Section 2(d) of the U.P. Act.

The next question, that generated lengthy debates, is : Does the supply E
of telephone connection involve a transfer of the right to use any goods or
amount to providing a service?

We have noticed above that the liability to pay tax under the U.P. Act
is on every dealer on his turnover of sales of purchases; it is also concluded
that telephone connection along with all accessories falls within the meaning F
of 'goods'; we have also opined that the definition of 'sale' in clause (h) of
Section 2 is an inclusive definition and includes a transfer of the right to use
any goods for any purpose.

It is necessary to notice here certain provisions governing supply of
telephone connection provided by the DoT which alone has exclusive privilege G
and control. We have perused 'the General Rules Governing the Provision of
Telephone Connections, Telex Connections and Accessories, Etc.' (for short,
'the general rules'). Rule 3 of the general rules says that all telephone
connections and other similar services provided or authorised by the departmeni
shall, unless governed by a separate contract, be subject to the conditions set
forth in the Indian Telegraph Rules. It further says that the Divisional Engineer H
804 SUPREME COURT REPORTS [2003) I S.C.R.

A shall install and, subject to observance of the Indian Telegraph Rules or the
specific Hiring Contract by the subscriber, maintain in good ·working order
the equipment and apparatus provided by the department and when necessary,
'
substitute a different apparatus in accordance with departmental instructidns
issued from time to time. The Indian Telegraph Act, 1885 (for short,· 'the
B ITA 1885') defines 'telegraph' to mean, any appliance, instrument, material
or apparatus used or capable of use for transmission or reception of signs,
signals writing images and sounds or intelligence of any nature by wire,
visual or other electro-magnetic emissions, Radio waves or Herzian waves,
galvanic, electric or magnetic means. 'Telegraph line' defined in Section
3(4) of the ITA 1885, means a wire or wires used for the purpose of a
C telegraph, with any casing, coating, tube or pipe enclosing the same, and any
appliances and apparatus connected therewith for the purpose of fixing or
insulating the same. In The Senior Electric Inspector and Ors. v. laxmi
Narayan Chopra and Ors., (1962] 3 SCR 146, a Bench of three !earned
Judges held that 'Telegraph line, is comprehensive enough and mearis a wire
or wires used for the purpose of an appliance or apparatus for receiving
D telegraphic or other communications by means of electricity, and it need not
be a continuous physical channel from the point of transmission to the point
of reception. A wireless transmitter transmits sound as electro-magnetic waves
and the said waves are detected by the aerial and fed into the receiving
apparatus by wires. So the wires of the aerial as well as of the apparatus are
E used for the purpose of the apparatus receiving communications. Thus, the
receiving apparatus employs 'telegraph lines' within the meaning of Section
3( 4) of the ITA 1885. Section 4 of the ITA 1885 declares that the Central
Government shall have the exclusive privilege of establishing, maintaining
and working telegraphs. In State of Bihar v. Mangat Sao, [1963] 1 SCR 148,
this Court was inclined to approve that Section 4 applied to telephone. The
F same view is reiterated in Delhi Science Forum and Ors. etc. v. Union of
India and Anr. etc., [1996] 2 SCC 405. Under Section 7 of the ITA 1885,
the Central Government is empowered to make rules c;nsistent with the Act
for the conduct of all or any telegraphs, established, maintained or worked
by the Government or by persons licensed under this Act. Clause (e) thereof
G provides that the rules may also be framed in regard to the conditions and
restrictions, subject to which any telegraph line, appliance or apparatus for
telegraphic communication shall be established, maintained, worked, repaired,
transferred, shifted, withdrawn or disconnected. Sections 20 and 21 make
unauthorised use of telegraph an offence.

H The Indian Telegraph Rules, 1951 (for short, 'the Rules') were framed
STATE OF U.P. v. U.0.1. [SYED SHAH MOHAMMED QUADRI. J.) 805

in exercise of the power under Section 7 of the ITA 1885. Rules in Part-V A
thereof deal with telephones. Under the Rules, the subscribers are required to
take .care of the telephone apparatus and in the event of the apparatus. in the
premises of the subscribers, being damaged or lost, they are obliged to pay
the cost of replacing and repairing. Rule 413 says that all services will be
subject to the said Rules. Rule 411 gives classification of the connections B
under various Heads. Rule 412 provides for supply and maintenance of
equipment by the Divisional Engineer, Telegraph. The Rules also provide for
)r
disconnection of service in certain conditions. Rule 434 prescribes charges
for various services, like installation and additional facilities, reconnection,
transfer, shifting, etc. For 'Measured Rate System' bi-monthly rentals have
to be paid by the subscriber at the prescribed rate as also the fees. Different C
rate is provided for 'Flat Rate System'. The Rules, referred to above, show
complete control of the DoT in regard to all matters connected with the
installation of the telephone by providing apparatus and matters connected
therewith including the charges payable by the subscribers for the service
provided. Rule 437 says that the rental for a period shall be payable before D
the commencement of that period. Rule 438 defined the term 'Rental periods'
• Monthly, bi-monthly and annual rental periods shall commence from the
first of a month or from such other day as the Telegraph Authority may fix:
rentals for broken periods of a month shall be charged proportionately. Though
calls whether local, STD or ISO are charged separately, rentals give allowance
for certain number of free calls. E
The case of the State is that in supplying instruments, accompaniments
and the telephone connection to a subscriber, the DoT which is having
exclusive privilege, is transferring the right to use those goods. The DoT
maintains that it is providing a service which does not involve transfer of a
right to use any goods and that by·the Finance Act, 1997, the Parliament has F
imposed service tax, as such the State cannot levy any tax under the U.P. Act.
The State, however, did not dispute that providing a telephone to a subscriber
was a service, but what was pressed was that in providing service, 'transfer
of the right to use the instrument, appliance and the whole exchange system
was involved'. Now, it is clear that when the DoT provides a telephone to a G
subscriber, it installs instrument, accessories and gives necessary connection
which enables him to access the whole system to avail of the service by
making out-going calls and receiving incoming calls whether local, STD or
ISO and that is compendiously termed as 'service'.

The question whether a given activity. is one of sale or service is a H
806 SUPREME COURT REPORTS (2003) I S.C.R.

A vexed question. The terminology employed to describe an activity as sale or
service is not conclusive in itself. By calling sale as service or vice-versa, the
substance of the transaction will not get altered. The question has to be
dete1mined by discerning the substance of the transaction in the context of
the contract between the parties or in a case of statutory contract in the light
B of the relevant provisions of the Act.and the Rules. If an activity or activities
are comprehensively termed 11s 'service' but they answer the description of
'sale' within the meaning of a Statute, they can nonetheless be regarded sale
for the purpose of that Statute. In other words, it is possible, an activity may
be service for purposes of one Act and sale for purposes of another Act. It
may also be that in a given case, on the facts of that case, a particular activity
C can be treated as 'service' but in a different fact situation the same could be
sale under the same Statute. In Mis. Northern India Caterers (India) Ltd v.
:..1. Governor of Delhi, [I 980] 2 SCC 167 the question that fell for consideration
of the Constitution Bench of this Court was, whether the service of meals to
casual visitors in the restaurant was taxable as a 'sale', (i) when the charges
were lump sum per meal or (ii) when they were calculated per dish? It was
D held that in both the above situations it would be 'service'. On an application
filed to review the said judgment while dismissing the review petition it was
observed that the judgment had rested on the factual foundation and must be
understood in that light. Rejecting the contention that the respondent therein
as well as the States were apprehensive that the judgment would be invoked
E by the restaurant-owners in cases where there was a sale of food and title in
the food passes to the customers, as one which could not be reasonably
entertained, it was held:

"fndeed, we have no hesitation in saying that where food is supplied
in an eating-house or restaurant, and it is established upon the facts
F that the substance of the transactions, evidenced by its dominant object,
is a sale of food and the rendering of services is merely incidental,
the transaction would undoubtedly be exigible to sales tax."

The learned Additional Solicitor General in support of his contention
G submitted that the DoT was providing service so it is not liable to tax under
the U.P. Act and invited our attention to the second part of the definition of
the word 'business' in clause (aa) of Section 2. The definition is extracted
above. The word 'business' is defined in relation to business of buying or
selling goods. The definition is in two parts. The first part ·includes among
others transfer of the right to use any goods for any purpose (whether or not
H for a specified period). The second part which excludes any activity in the
STATE OF U.P. v. U.0.1. (SYED SHAH MOHAMMED QUADRI. J.] 807

nature of mere service not involving purchase or sale of goods reads, ''but A
does not include any activity in the nature of mere service or profession
which does not involve the purchase or sale of goods." "It was argued that
any activity in the nature of mere service or profession is excluded from the
definition of the term 'business' and as the DoT is providing service, the
same cannot be subjected to tax. In our view, the contention though attractive, B
is devoid of any substance. There are more answers than one to this contention.
The first is that the definition of a 'dealer' takes in 'a Government', when it
sells, supplies, etc. whether in the course of business or otherwise. Therefore,
it is not necessary that the activity of sale, etc. by the DoT should be in the
course of business. Even assuming that the supply of the telephone to a
subscriber, being, a service, falls outside the meaning of the term 'business', C
the DoT would nonetheless be liable to pay tax under the U.P. Act as a
'dealer' for the simple reason of transferring the right to use the telephone
instrument/apparatus and the whole system as that falls within the extended

.. meaning of 'sale' under clause (h) of Section 2 of the U.P. Act. And the
second is, only such service is excluded from the definition of the term
'business' which does not involve the purchase or sale of goods. In the D
instant case, it cannot be legitimately disputed that the service involves
installation of instrument and access to the exchange and telephone system
as a whole which has been found to fall within the meaning of the term
'sale'. Therefore, the second part of the definition of the term business is of
no help to the DoT. E
It was then urged that in providing telephone service by the DoT,
installation of instrument/apparatus and appliances is insignificant and in
many cases subscribers themselves have their own instruments; the more
important part is access to the area exchange and the whole system connected
thereto without which the installation is of no consequence and the same F
remains under the possession and full control of the DoT so there was .no
transfer of the right to use any goods so as to attract liability under the U.P.
Act. We are not persuaded to accept this submission. It is true that unrler the
Rules, referred to above, as service, a number is allotted, an instrument/
apparatus and other appliances are installed at the premises of a subscriber G
and the same are connected with the area exchange to enable him to have
access to the whole system, to dial and to receive calls. In our view, it makes.
no difference whether any subscriber replaces instruments of the DoT with
his own instrument because the most important thing is the connection of the
subscriber's telephone number with the area exchange and that was provided
by the DoT. Insofar as the contention of giving possession or control of the H
808 SUPREME COURT REPORTS (2003) I S.C.R.

A whole system of Exchange is concerned, which is said to comprise mostly of
immovable property, it needs to be borne in mind that handing over of the
possession is not sine qua non completing the transfer of the right to use any
goods. It was so held by a Constitu.tion Bench of this Court. in 20th Century
Financ~ Corporation Ltd. and Anr. v. State of Maharasahtra, [2000] 6 SCC
12. A 'transfer of the right to use any goods' will be complete according to
B the law laid down by the majority in that case, on completion of the contract
to transfer of the right to use the goods. The contention that the area telephone
exchanges and other systems would remain under the control of the DoT, are
irrelevant to complete such a transfer. Even otherwise, after installation of
the instrument and other appliances, once the DoT connects the telephone
C line of the assigned number of the subscriber to the area exchange, access
to other telephones is established. There cannot be denial of the fact that
giving such an access would complete the transfer of the right to use the
goods. However, reliance is placed on the decision of the High Court of
Andhra Pradesh in Rashtriya /spat Nigam ltd v. Commercial Tax Officer,
[ 1990] 77 STC 182 which was affirmed by this Court in State of Andhra
D Pradesh and Anr. v. Rashtriya /spat Nigam Ltd., [2002] 126 STC 114. It is
unnecessary to <.teal with these cases in any detail; suffice it to say, in that
case there was a finding of fact that the transaction did not involve transfer
of the right to use the machinery in favour of contractors and that determined
the issue.
E It may be mentioned that during the relevant period (1988) no service
tax was enforced. Jt was in 1994 that service tax was levied for the first time
as per Chapter V of the Finance Act, 1994. Section 66 thereof created charge
of service tax in regard to taxable services. 'Service tax' is defined in clause
(34) of Section 65 to mean tax chargeable under the provisions of that Chapter.
F 'Taxable service' is defined (under sub-clause (b) of clause 41 of Section 65)
to mean any service proyided to, inter alia, a subscriber by the telegraph
authority in relation to a telephone connection. No provision of the U.P. Act
or the said Finance Act, 1994 or the Constitution of India is brought to our
notice to hold that rentals collected by the DoT from the subscriber cannot
G be subjected to tax as is done under the U.P. Act. Merely because service tax
is imposed by the Parliament under the said Finance Act in respect of
telephone connection to a subscriber, is no ground to hold that the .State
cannot levy tax under the U.P. Act.

For the aforementioned reasons, we hold that providing telephone service· ·
H by the DoT which comprises of allotment of number, installation of an
·~
STATE OF U.P. v. U.0.1. [SYED SHAH MOHAMMED QUADRI, J.) 809

instniment/apparatus and pther appliances at the premises of a subscriber, A
which ar• connected with a telephone line to the area exchange to enable him
to have· access to the whole system, to dial and to receive calls, in effect, falls
within the meaning of the extended definition of'sale', viz. within the meaning
of 'the transfer of the right to use any goods' and the fact that it is described
as service under the !TA 1885 and the Rules made thereunder or under the
Finance Act. 1994 would not militate against the same being a 'sale' within B
the meaning of the U.P. Act.

The contention that remains to be considered is that in a contract
providing telephone by the Dot the service and sale - transfer of the right to
use the goods - are so inter-twined that the rentals cannot be attributed to C
one or the other part and, therefore, such a composite contract cannot be
dissected so as to attribute one part of the rentals to service and the other
part to the transfer of the right to use the goods and accordingly assess that
part of rentals to tax. Reliance was placed on a decision of this Court in
Northern India Caterers, (supra) and it was added that it had resulted in
insertion of sub-clause (f) in clause 29-A of Article 366 of the Constitution; D
the argument proceeded that as there was no such provision to tax service in
sub-clause (d) of clause 29-A, no tax could be levied by the State. We shall
deal with this argument with the contentions of Mr. Joseph Vellapally, learned
senior counsel appearing for the intervenors. He focussed on the fact that the
instrument could be used only when access to the whole system is provided E
by the DoT and argued that when the contract was a composite contract
involving service and the transfer of the right to use any goods, in the absence
of any provision in the Constitution enabling the State to levy tax for service
separately, no tax could be levied and collected under the U.P. Act. Mr. Sunil
Gupta submitted that in a case of composite contract, the dominant object test

- will have to be applied.

The following three situations were adverted to in the submissions:
F

(I) where the service is the main object of the contract and the
supply of other things are merely incidental to enable the
enjoyment of the service itself; G
(2) where the service is incidental and the real contract is to sell the
goods; and
(3) where both the service as well as the sale of goods are equally
prominent and they have been clubbed in one contract.
H
810 SUPREME COURT REPORTS [2003) I S.C.R.

A Whether a given contract falls under one or the other category is
essentially a question of fact to be determined on the terms of the contract
between the parties or, in case of a statutory contract, the rules governing
such a contract.

Whereas in the case of a composite contract falling under the first
B category, where the service is the dominant object of the contract, the supply
of goods is incidental to the enjoyment of the service; for example, in a hotel,
where a room is hired, the supply of ornamental objects in the room, like
chandelier, scenery, decoration pieces in the room or items, like linen, soap,
shampoo etc. are incidental to make the service more useful, effective and
C attractive. Jn such a case, it is not possible to separate service from the supply
of goods. This principle was laid down by this Court in State of Himachal
Pradesh v. Associated Hotels of India ltd, (1972) 29 STC 474 SC and
affirmed in Northern India Caterers, (supra).

The insertion of clause 29-A in Article 366 of the Constitution of India
D did not altogether obliterate the distinction between sale and service, except
in a case falling under sub-clause (t) thereof which enables levy of tax on the
supply, by way of or as part of any service or in any other manner whatsoever,
of goods, being food or any other article for human consumption or any
drink (whether or not intoxicating), where such supply or service, is for cash,
E deferred payment or other valuable consideration. In such a case, the transfer,
delivery or supply of any goods shall be deemed to be a 'sale' of those goods
by the person making the transfer, delivery or supply and a purchase of those
goods by the person to whom such transfer, delivery or supply is made. In
other respects the distinction between sale and service for imposing tax is
maintained.
F
In regard to sale of goods where the service is incidental, the principle
of non-separatability will apply in the absence of a specific valid statutory
provision; for example, in a restaurant/hotel, where food or other articles are
sold, the supply of service like providing cutlery washing liquid, towels,
music, etc., is merely incidental and it would not be permissible to treat such
G service as a transfer of right to use the goods for the purpo.se of taxation
under the relevant Sales Tax Act. Where, however, the supply of service as
well as supply of goods are prominent objectives and they have been clubbed
together under a composite contract, it would be possible to treat them
separately; for example, where in a holiday package, transportation, boarding
H and lodging are separately treated, it would be possible to assess them
STATE OF U.P. '" U.0.1. [SYED SHAH MOHAMMED QUADRI, J.) 811

separately, though covered under the same contract. A
In British Railways Board v. Customs and Excise Commissioners,
[Simon's Tax Cases, 1977 (page 221)] the question before the Court of
Appeal was : whether the supply of a student identity card constituted the
supply of service of a description which qualified for zero-rating. In that
case, the British Railways Board provided special facilities for rail travel by B
1tudents. A student could purchase an identity card for pound 1.50 to enable
him to obtain rail ticket at reduced rates. It was held that sale of identity card
and the subsequent sale to the card-holder of a ticket for a particular journey
at a reduced price could not be treated as separate and isolated transactions
and, therefore, pound J.50 paid for the identity card was properly to be C
regarded as a part payment in advance for the supply of transport service.

British Airways Pie v. Customs and Excise Commissioners [Simon Tax
Case. [1990] page 643; is a case wherein in the flights operated by the British
Airways to transport passengers by air, food was served to the passengers, the
price was the same whether or not a passenger availed the facility of food. The D
Court of Appeal observed that the question was : whether British Airways had
made one supply or two supplies. It was held that in flights catering was part
of and integral to the supply of transportation and, accordingly, British Airways
had made only one supply, that of air transportation.

To the same effect is the view in Custom" and Excise Commissioners E
v. British Telecommunications Pie [Simon Tax Cases, [1999] (page 758). In
that case British Telecommunications purchased new cars for its fleet of
· vepicles. The question that arose was : whether the sale of cars and their
transportation to the agreed delivery point comprised two distinct supplies.
The Tribunal found that the two are different and distinct services. The Court F
of Appeal held that the supply of the service of delivery was physically and
economically distinct from the supply of the car. On appeal, the House of
Lords held:

"In order to identify the supply it was necessary to consider whether
-I
the delivery was ancillary or incidental to the supply of the car or was G
a distinct supply. The fact that separate charges were identified in a
contract or on an invoice did not on a consideration of all the
)(
circumstances necessarily prevent the various supplies from
constituting one composite transaction nor did it prevent one supply
from being ancillary to another supply which for value added tax
(VAT) purpose was the dominant supply. Although each supply in a H
812 SUPREME COURT REPORTS [2003) I S.C.R.

A composite transaction might be an indepen.dent separate supply, the
essential features of a transaction might show that one supply was
ancillary to another and that it was the latter that for VAT purposes
was to be treated as the supply. In the instant case it was artificial to
split the various parts of the transaction into different supplies for
VAT purposes. What British Telecommunications wanted was a
B delivered car; the delivery was incidental or ancillary to the supply
of the car and it was only on or after delivery that property in the car
passed. Accordingly, if the transaction was looked at as a matter of
commercial reality, there was one contract for a delivered car and one
supply for VAT purposes.''
c Having given our anxious consideration to the submissions made in
regard to the composite contract of service of goods and the classification,
above referred, we are of the view that they will not apply to the present case.
Here the service of telephone connection cannot be artificially split into
various categories - supply of instruments and accompaniment on the one
D hand and supply of telegraphic line/connection on the other, to narrie the
fonner as 'sale' and the latter as 'service' . The analogy of composite contract
will apply where 'sale' and 'service' are to different independent objects.

Inasmuch as we have found that the DoT is a 'dealer' as defined in
Section 2(c) of the U,P. Act and it collects rentals for the supply of transfer
E of use of telephone connection, which is compendiously called 'service' and
that the supply of telephone satisfies the requirements of a transfer of the
right to use the goods within the meaning of 'sale' in Section 2(h); it also
receives consideration, therefore, the requirements of charging Section 3 read
with Section 3 F are satisfied. The jugdments and orders under challenge in
F these appeals are, therefore, set aside.

In Union of India and Ors. v. Secretary, Revenue Department (CTJJ),
Government of Andhra Pradesh and Ors., {1999) 113 STC 203, the High
Court of Andhra Pradesh took the view that the rentals are not subject to
sales tax within the meaning of provisions of the Andhra Pradesh General
G Sales Tax Act, 1957. This judgment and the judgment under appeal was \.

followed by the, High Court of Punjab & Haryana in Union of India and Anr.
v. State of Haryana and Anr., [2001) 123 STC 539 to hold that the rentals
collected by the DoT cannot be equated with sale of goods or deemed sale
of goods by way of transfer of the right to use goods within the meaning ~f
the Haryana General Sales Tax Act, 1973. For the aforementioned reasons
H we overrule those judgments.
STATE OF U.P. v. U.0.1. [SYED SHAH MOHAMMED QUADRI, J.) 813

We must, however, consider the last submission that the impugned A
demands relate to not only rentals but also to various other charges and,
therefore, for working out the correct demand, the cases have to go back to
the assessing officer for raising fresh demand. We find considerable force in
that submission. We set aside the demand in question and direct the DoT (the
respondent) to file the 'Returns' within three months from today. The Assessing B
Authority shall make order of assessment and raise fresh demand in accordance
with law.

The appeals are accordingly allowed with costs.

N.J. Appeals allowed.