The Supreme Court on Monday directed the Karnataka state tax appellate authority to decide whether value-added tax (VAT) should be levied on Internet broadband services provided by Bharti Airtel Ltdand other companies.

The issue needs to be examined by experts and the first appellate authority would be the right forum to decide the matter, said the bench headed by justice S.H. Kapadia.

The court asked Bharti, Hathway Datacom Pvt. Ltdand the Karnataka government to appear before the authority in two weeks.
The matter needs adjudication and we are not experts, the court observed when Bhartis advocate said the transmission of electromagnetic waves through optical fibre cables did not amount to the sale of data.

Anitha Shenoy, the Karnataka government advocate, justified the imposition of tax as the state also levies tax on the sale of electricity to consumers.

The government should not insist on the providers depositing the amount with tax authorities, the court directed.

The state government had demanded Rs25.6 crore in taxes from Bharti Airtel, the countrys largest mobile phone operator.

The lower court had upheld a Karnataka government order asking Bharti to pay the amount, saying that the transmission of data and voice through the Internet from one point to another amounted to the sale of goods.

The company also contested the view that the transfer of the right to use its network to subscribers amounted to a transaction involving artificially created light energy that was liable to VAT.

The Karnataka sales tax authorities sought the amount, which includes penalties and interest, following a high court judgement. The company provided goods, not services, and should therefore pay VAT under the Karnataka Value Added Tax Act, 2003, the high court said.

The tribunal will decide whether light energy can be classified as goods and whether the transfer of data and voice through the Internet would attract sales tax. The transmission of such energy through optical fibre cant be classified as goods, Airtels advocate said.