Andhra Pradesh High Court addresses taxability of income streams of telecom operators.
 
A recent article in this column had discussed the issue of taxability of mobile SIM cards, given the considerable and prolonged litigation relating thereto, and its resolution by the Supreme Court vide its decision in Idea Mobile Communication Ltd. Vs. Commissioner of Central Excise (2011-VIL-17-SC) where it had held that the transactions relating to supply of SIM cards from the telecom operators to the subscribers would be charged to the service tax alone and not to the goods tax, in the form of the sales tax. A recent decision of the Andhra Pradesh High Court, in State of Andhra Pradesh Vs. Bharat Sanchar Nigam Limited (2011-VIL-49-AP), has, following the above decision, reaffirmed the correct taxability of SIM cards but has also gone beyond, to address the taxability of various other elements of telecom services and is hence significant.

The High Court addressed the taxability of the following elements of telecom services:

SIM cards- prepaid and post paid  
Recharge coupons  
Mobile telephone rentals 
Value added services (VAS)  
Sharing of infrastructure  
Supply of telephone instruments, mobile handsets, modems and caller ID instruments  
Refundable and non refundable deposits.
As already indicated, the High Court has followed the Supreme Courts decision as above and held that the supply of SIM Cards, both prepaid and post paid, amounts to a service and is hence not chargeable to sales tax.

On recharge coupons, it was argued by BSNL that they provided the benefit of extension of talk time/validity of the connection to subscriber and were hence incidental and ancillary to the provision of the telecommunication service itself. The intent of the parties was not to sell or purchase recharge coupons, as goods. The Revenue contended that such coupons were indeed goods as they were tangible and freely exchangeable, once purchased. They were goods also for the reason that they could be kept as stock in trade and were indeed so kept, by the channel partners of the telecom operators. It was further argued that the relevant taxing entry in the A.P. VAT Act extended to coupons of all kinds and classes. The Court however disregarded the argument and applied the dominant intent test, as per the Supreme Courts decision in BSNLs own case, to hold that such coupons fell within the ambit of telecommunication services as the intent between the contracting parties was only that of provision of services. The Court also took note of the stand of the Revenue that recharge coupons stood on equal footing as SIM cards and held that since SIM cards had been held to be not goods, recharge coupons would similarly not constitute goods.

On mobile telephone rentals, it was submitted by BSNL that these were evidently for rendering telecommunication services and could not be attributed towards recoveries on sale of SIM cards or be treated as consideration for the transfer of the right to use such cards. Indeed, there was no recovery at all on account of activation and/or provision of SIM cards from post paid subscribers and hence, as regards this category of customers, the question was entirely academic. On the other hand, the Revenue argued that monthly mobile rentals constituted consideration for the transfer of the right to use SIM cards and since effective control and possession of the SIM cards vested with the subscribers, such rentals ought to be charged to the goods tax, as a deemed sale. The Court negatived this argument by relying on the fact that SIM cards were not goods and held that such monthly rentals could only be ascribed to provision of telecom services and accordingly set aside the imposition of the sales tax/VAT.

The Court then considered the whole area of value added services (VAS). It noted that telecommunication services were capable of enhancement or value addition in a variety of ways. These enhancements were provided through deployment of software and were telegraphically transmitted. The textual, audio and visual data so transmitted were all telecom services. The Court noted the important point that in order to be taxable as goods, any software should acquire the status of goods while still in the hands of the supplier and the fact that the software was used as the means by which services were provided could not be a ground to argue that such services could be taxed as goods, in the form of software.

The Court also noted that such software was neither downloaded nor stored in a physical medium at any time from the time of transmission from the service provider to the time of receipt by the subscribers. The Court held that there was just the one single and indivisible contract for provision of telecommunication services and no part of it could be broken down to supposedly isolate any element thereof and treat it as a sale of goods. The Court considered the provisions of various statutes and also considered the decisions of the Courts which had held that goods extended to intangibles as well if they possessed certain attributes relating to tangibles. In the case of VAS, the Court noted that none of these attributes were present. There was also no transfer of the right to use that was effected by the telecom operator to the subscriber. The Court also took note of the fact that electromagnetic waves had been held to be not goods in themselves. Accordingly, it concluded that VAS could not be charged to the sales tax either as software or as electromagnetic waves.

On the next point regarding fees for sharing of infrastructure, BSNL submitted that it had entered into agreements with other telecom operators to share the passive infrastructure in the form of towers which were erected on land or on building rooftops, together with the supporting assets which housed such towers in the form of base station, air conditioning equipment, diesel generating set etc. It was argued that there was no transfer of any title or interest in such infrastructure to anyone else nor was there any transfer of the right to use. Moreover, such passive infrastructure was in the nature of immoveable property and it could not be argued that any part of such infrastructure, comprising of the assets described above, could constitute goods so as to be taxable under the sales tax or VAT law. On the other hand, the Revenue argued that the infrastructure sharing fee collected by BSNL from other service providers under the above agreements comprised the charge for lease of the underlying equipment. Further, the goods in question were moveable since all of them, including the towers, could be dismantled and taken out and their affixation to the ground was temporary. The High Court took note of the definitions of immoveable property contained in the statute and applied the test of permanency as to whether the chattel was movable to another place and used in the same position or could only be dismantled and then re erected at the another place. The Court noted that a telecom tower was immoveable property in that it could not moved to another place of use in the same position but could only be dismantled or reerected at such other place. Accordingly, it held that the passive infrastructure could not be held to be moveable goods so as to be charged to the sales tax. Further, the Court held that even if some of the equipments were in and of themselves goods, nevertheless there was no transfer of the right to use such goods but only a right to use was provided. The effective control and possession of such equipment continued with the passive infrastructure owner and therefore no transfer of the right to use any goods was envisaged. Thus, the Court held that no part of the infrastructure sharing fee could be treated as relating to goods, so as to be charged to the sales tax.

On recoveries relating to supply of telephone instruments and modems, the Court noted that these were provided free of charge to subscribers. However, to the extent that rebates in installation charges were provided where such instruments were supplied by the telecom operators, it would be construed as a consideration for either the sale or the transfer of the right to use such instruments, which were undoubtedly goods. It was noted that in no case were mobile handsets provided by the telecom operators and the subscribers had to purchase such instruments on their own.

The Court held that in such cases where the subscribers purchased equipment on their own, from other than the service providers, there could be no question of any sale of goods or transfers thereof and hence no part of the charges for telecom services could be taxed, as relating to such equipment. The Court remanded the matter to the jurisdictional authorities to decide the point after ascertaining the underling facts.

On the last category of refundable and non refundable deposits, the Court considered the factual position that such deposits were obtained in a numbers of situations. Also, they were either collected from the distributors or from the subscribers.

The Court accordingly held that non refundable deposits collected by the service providers from distributors, as security deposits for supply of SIM cards, recharge coupons etc. could not be charged to sales tax since the underlying SIM cards etc. were not goods. Similarly, refundable deposits collected from post paid subscribers, as security for provision of STD/ISD facilities would again not be charged to the sales tax, as these were not related to goods. If, on the other hand, either refundable or non refundable deposits were obtained from subscribers against supplies of telephone instruments etc. and it was established that the deposits were a form of consideration either for the sale or the transfer of the right to use such instruments, they would be subject to tax. The above decision of the Andhra Pradesh High Court is significant in that it has addressed the taxability of the various income streams of the telecom operators and, by applying first principles of law, arrived at definitive conclusions on which of the goods tax or the service tax would alone apply to the transactions in question.