1. In these petitions, the petitioners have prayed for striking down Section 2(1)(iv) of the Haryana General Sales Tax Act, 1973 (as amended by Haryana Act No. 11 of 1984) (hereinafter referred as "the 1973 Act") and also for quashing of the assessment orders passed by the Assessing Authority, Ambala Cantonment (respondent No. 2), as well as the demand notice issued by the said authority.

2. On September 25, 1996 a division Bench had adjourned these petitions sine die with the direction that the same be listed for hearing after the decision of S.L.P. No. 5247 of 1986 filed by the petitioners against the order dated November 14, 1985 passed by this Court, dismissing Civil Writ Petition No. 5381 of 1985, filed by the petitioners for grant of similar relief.

3. A perusal of the record shows that Civil Writ Petition No. 5381 of 1985 filed by the petitioners for quashing of the order of assessment passed in relation to the assessment year 1983-84 was dismissed on November 14, 1985 on the ground of availability of alternative remedy. The S.L.P. filed by the petitioners was allowed by the Supreme Court on August 25, 1998 in the following terms :

"Having heard learned counsel for the parties at length, we are of the view that these are the matters which should not have been dismissed by the respective High Courts in suggesting an alternative remedy. The question raised was pristinely legal which requires determination as to whether provision of telephone connections and instruments amounted to sale and even so why was the Union of India not exempt from payment of sales tax under the respective statutes. The respondents counter such stance. We think the question raised was fundamental in character and need not have been put through the mill of statutory appeals in the hierarchy. For this reason alone, we set aside the respective impugned orders of the High Courts and remit the writ petitions back to them for decision in accordance with law. The recovery of tax would stand stayed till the disposal of the writ petitions. Ordered accordingly. No costs."

4. In view of the order passed by the Supreme Court, the petitions have been listed for hearing on merits.

5. The petitioners have averred that the Department of Telecommunications of the Government of India is engaged in the providing of the telephone connections to the subscribers in accordance with the provisions of the Indian Telegraphs Act, 1885 (for short, "the 1885 Act") and the rules framed thereunder and in lieu of the services provided to the subscribers, rent is charged at the prescribed rates. They have averred that after coming into force of the haryana act no. 11 of 1984, the Assessing Authority, Ambala (respondent No. 2) issued notices for assessing them under the 1973 Act for the assessment years 1985-86 and 1986-87, and ultimately passed orders directing them to pay sales tax amounting to Rs. 41,10,832 in respect of the assessment year 1985-86 and Rs. 54,35,056 in relation to the assessment year 1986-87. Immediately thereafter, respondent No. 2 issued demand notices in form S.T. 28 requiring them to pay the amount of tax with a threat of making recovery by treating the same as arrears of land revenue.

6. The petitioners have challenged the orders of assessment and the demand notices primarily on the ground that the Telecommunications Department of the Government of India does not fall within the definition of "dealer" under Section 2(c) of 1973 Act. They have averred that the department does not carry on any business, trade in telecommunication system, but merely discharge the public duties of modern Government and realise the rent for the public utility service rendered to the citizens. They have further averred that the subscribers enjoy the facility provided by the Telecommunications Department under the 1885 Act and Indian Telegraph Rules, 1951 (for short, "the 1951 Rules") framed thereunder and this facility cannot be described as "sale" as defined under Section 2(1)(iv) of the 1973 Act. Still further, they have averred that when a subscriber is given a telephone connection with an instrument of receiving calls and also making calls, which is connected with the permanent telephone line laid up to the subscriber's place, then the telephone system is installed and the same is connected with the exchange, it cannot be said that by this process, there is any transfer of any right to use any goods coming within the meaning of Section 2(1)(iv) of the 1973 Act. The instruments which enable the subscriber to receive calls and to make calls cannot be looked at in isolation of the fixed telephone lines and the exchange to which the instrument is permanently connected. Under the 1951 Rules, a subscriber is not allowed to shift the telephone from where it is originally fixed without prior approval/permission of the department. It is the total system which enables the subscriber to avail of the telecommunication facility and the entire telecommunication system with the exchange cannot be described as goods since the items constituting the system are not chattels. According to the petitioners, the orders of assessment passed by respondent No. 2 and the demand notices issued by him are without jurisdiction being ultra vires to the provisions of the 1973 Act.

7. In their written statements the respondents have averred that the petitioners are carrying on business of sale and supply of goods within the meaning of the terms as defined in the Constitution of India and in the 1973 Act. According to them, the telecommunication service is not a sovereign function of the State but is a purely commercial activity because the right to use the tele-equipment installed at the premises of the customer is transferred to the latter for a valuable consideration. The respondents have further averred that in the first instance, the separate charge is made for installation of the goods in premises and the subscribers are also required to deposit security. Thereafter, besides the minimum fixed rental, for the transfer of the right to use the petitioners' telecommunication goods, more payment is realised from the customers, in case the use exceeds the specified number of calls. Such transfer of right, for valuable consideration known as rent are sales and their turnover is liable to sales tax under the 1973 Act. The respondents have justified the impugned orders and the notices by contending that the sales tax has been assessed and levied not for use of the telecommunication facilities by the subscribers but on the turnover of the transfer of the right to use the goods in favour of the so-called telephone subscribers and it is absolutely in accordance with law and not at all unjustified.

8. Shri Gurpreet Singh, learned counsel for the petitioners, argued that the activities of the Telecommunications Department for providing telephone facilities to the subscribers fall in the realm of sovereign functions and, therefore, it cannot be treated as dealer within the meaning of Section 2(c) of the 1973 Act, simply because some rent is charged for the instrument provided at the premises of the subscriber and the latter is made to pay for wiring, etc. Learned counsel submitted that the entire telecommunication system works under the control of the department and the subscriber cannot transfer or shift the telephone without the consent of the competent authority and, therefore, no sales tax can be levied on the rental charges payable by the subscribers by treating it as a transfer of right to use the commodity within the meaning of Section 2(1)(iv) of the 1973 Act.

9. Shri Jaswant Singh, learned Deputy Advocate-General, contended that the Telecommunications Department of the Union of India is engaged in commercial activities and is not discharging any sovereign function and, therefore, it falls within the definition of "dealer" under the 1973 Act. He pointed out that after the supply of the instrument to the subscriber and its connectivity with the telephone exchange, the subscriber has the exclusive control over the instrument and, therefore, it falls within the meaning and expression "sale of goods". He contended that once it is established that the petitioner is a dealer and has given the exclusive right to use the instrument and the communication system, and that providing of the instrument is a commercial activity, then the over all turnover comes under the definition of "sale" and the assessment is to be made under the 1973 Act on the value of the work and that Union of India and its departments are liable to pay the sales tax.

10. We have given serious thought to the respective submissions. For the purpose of deciding the issues 'raised by the petitioners, it would be useful to notice the relevant provision of the 1973 Act. The same are as under :

1973 Act :

"2(c) 'dealer' means any person including a department of Government who carries on, whether regularly or otherwise, trade, whether with or without a profit-motive, directly or otherwise, whether for cash, deferred payment, commission, remuneration or other valuable consideration, of purchasing, selling, supplying or distributing any goods in the State, or importing into, or exporting out of the State, any goods, irrespective of the fact that the main place of business of such person is outside the State and where the main place of business of such person is not in the State, includes the local manager or agent of such person in the State in respect of such business.

(1) 'sale' means any transfer of property in goods for cash or deferred payment or other valuable consideration and includes--

(i) transfer, otherwise than in pursuance of a contract, of property in any goods for cash, deferred payment or other valuable consideration ;

(ii) transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract entered into on or after the 18th day of April, 1984 ;

(iii) delivery of goods on hire purchase or any system of payment by instalments ;

(iv) transfer of the right to use any goods except tents, kanats, chholdari, crockery, utensils, furniture and all other goods dealt with by the tent dealers as also other allied dealers for decoration and lighting purposes for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration ;

(v) 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, deferred payment or other valuable consideration, and such transfer, delivery or supply of any goods shall be deemed to be sale of those goods by the person making the transfer, delivery or supply to a person to whom such transfer, delivery or supply is made but does not include a mortgage, hypothecation, charge or pledge."

1951 Rules :

"2.(z) 'measured rate system' means a system of a charging of telephone under which a subscriber pays a fixed annual rental for the line connecting his telephone to any exchange within the exchange system and entitles him to make calls free of charge up to a specified number of call units during a fixed period, each call unit in excess of that number being charged at the prescribed rates ;

2.(aa) 'Message rate system' means a system of charging on telephones under which a subscriber, besides paying a fixed annual rental for the line connecting his telephone to any exchange within the exchange system, is also required to pay call fees for each call from his telephone at rates prescribed for such calls ;

414. Applications for connections.--(1) Applications for the provision of telephone and other similar service or for alteration to any existing service shall be made in writing and in such form and manner as may from time to time be prescribed by the Telegraph authority.

434. Schedule of fee and charges.--The charges for various services under these rules shall be as under specified :--

SECTION I FEES.

I. Installation fees :

(a) for each telephone connection (excluding casual connection from a departmental exchange), internal or external extension, private exchange connection, private branch exchange connection, junction lines to private branch exchanges and for each end of a private wire or non-exchange lines :--

(i) in an exchange system of less than 500 lines

(ii) in an exchange, system of 500 lines and above

(b) for a casual connection from a departmental exchange

(c) for loudspeaking telephones

(d) for the following additional facilities :

(i) extra bell

(ii) extension bell with switch

(iii) (1) for a plug and socket arrangement comprising one plug for terminating the telephone instruments and two sockets.

(2) for each additional socket

(iv) for long cord (1) up to 5 metres in length (2) for every additional 5 metres length The installation charges specified in item (d) shall cover normal wear and tear. Replacement of these facilities after the expiry of three years, shall be chargeable afresh at the rates indicated above.

Note 1. Installation fees are leviable on all new installations, permanent and temporary, including Own Your Telephone Connections.

Note 2. Installation fees for private and private branch Exchange Switch-Boards are leviable at the scale shown in section VIII.

Note 3. Where the subscriber is (permitted/required) to arrange with reference to item (a)(ii) above :

(a) internal wiring-himself, a rebate of Rs. 250 shall be allowed ;

(b) internal wiring and his own instrument, a rebate of Rs. 500 shall be allowed.

Note 4. Where the subscriber is (permitted/required) to arrange internal wiring himself for items other than item (a)(ii), the installation charges shall be 50 per cent of the above charges."

11. An issue similar to the one raised in these petitions was considered by the division Benches of the Andhra Pradesh High Court and the Allahabad High Court. In Writ Petition Nos. 25864 and 11826 of 1997 and 6742 of 1996 titled Union of India v. Secretary, Revenue Department (CT II), Government of Andhra Pradesh [1999] 113 STC 203, a division Bench of the Andhra Pradesh High Court held as under :

"...............................telephone facility is not merely installation of telephone instrument at the consumer's residence, it is in fact maintenance of a system at an exchange which exchange is connected by way of the instrument which is placed at the consumer's place. The instrument in itself is a useless thing unless it is connected to a system. It becomes only a service once it is connected to a system by Telecommunications Department and as such there is no transfer of any tangible thing to the consumer, only a facility is provided which by no stretch of imagination can be transferred as goods."

12. Similarly, in Civil Miscellaneous Writ Petition No. 115 of 1995 (Union of India v. State of U.P. [1999] 114 STC 288), a division Bench of the Allahabad High Court held as under :

"But, what has constrained the court is that the State of U.P., not sovereign under the Constitution and in its functions in juxtaposition to the Government of India was destroying the subject which it was taxing. The subject was torn out of context. It is a cardinal principle that tax is an incidence and may be extracted but not destroy the subject. The State of U.P. is not a superior sovereign power more so in the context of the Constitution of India where the delicate balance has clearly been separated on who may tax whom and with what immunity, including exemptions. The Supreme Court, in re : New Delhi Municipal Committee AIR 1997 SC 2847, in no uncertain terms, has held that the Union of India enjoys immunity from State taxation. The States of the Union are protected by exemptions referred to in Article 289 of the Constitution of India."

13. We respectfully agree with the views expressed by the Andhra Pradesh and Allahabad High Courts and add that what the petitioners are charging is the rent for connecting instrument placed in the premises of the subscriber with the telephone exchange by way of telegraphic lines. Till the instrument is connected with the telegraph lines to the telephone exchange, the instrument placed in the premises of the subscriber is useless. Through the telegraph lines, the apparatus receives the telegraphic or other communication by means of electricity. So the petitioners are charging the rent for telegraphic lines including the instrument. Therefore, mere charge of the rent or fee as per measured rate system or message rate system cannot be equated with sale of goods or deemed sale of goods within the meaning of the 1973 Act. As a logical corollary to the aforementioned conclusion, we hold that the orders of assessment passed by respondent No. 2 and the demand notices issued by him are without jurisdiction and the same are liable to be quashed as such.

14. Before concluding we may mention that although the petitioners prayed for striking down Section 2(1)(iv), learned counsel for the petitioners had stated that he does not want to press this prayer and, therefore, we refrain from making adjudication upon the vires of the said section.

15. For the reasons mentioned above, the writ petitions are allowed. The impugned assessment orders and the demand notices are declared illegal and quashed. The parties are left to bear their own costs.