Bharati Airtel Limit... v. State Of Karnataka, ...

Anand Byrareddy, J.

Both these petitions are heard and disposed of together, since they raise identical issues and are filed under similar circumstances.

2. The petitioner is a company incorporated under the Companies Act, 1956 and is a licensee under the Indian Telegraphs Act. The petitioner is authorised to operate Cellular Mobile Telephone Services within the State of Karnataka and the Karnataka Telecom Circle.

The petitioner provides various types of telephone services including a GSM Mobile Phone Service, which is activated by the use of a Subscriber Identification Module Card popularly known as a SIM Card, which is an electronic chip. The petitioner also provides GSM Fixed Wireless Phone Services (hereinafter referred to as ‘the FWP’ for brevity). The SIM Card and the FWP are enabling devices supplied by the petitioner to its subscribers, so as to enable the subscriber to access the services provided.

It is the petitioner's case that neither of these devices are supplied at a cost to the subscriber, but are retained as the property of the petitioner and are only provided to the subscribers in order to enable them to avail the services which are contracted for. The petitioner has two kinds of billing systems — one, where a subscriber can avail the services after payment of a certain amount for a specified time and usage and the other where it is post-paid, namely, the subscriber pays the service charges after availing the services. Under both these schemes, service tax is collected in respect of the services provided. In the first instance, the activation device is charged. Even for this, service charges are collected and other than this, there are no additional charges collected towards the provision of the SIM Card or the GSM FWP, for the reason that without activation, neither the same SIM Card nor the GSM FWP would have any value and are totally useless. In terms of the subscriber agreement form, which is mandatorily required to be executed by the subscriber, it is expressly stated that the above said devices would continue to be the property of the petitioner and in the event the subscriber wishes to discontinue the services, these devices would have to be returned to the petitioner. The petitioner has dealers and franchisees across the State of Karnataka, through whom the subscribers forward their applications and services are provided by the activation and charging of the devices.

The retail outlets where subscribers can procure these services necessarily carry the above devices and in order to safeguard the same from moisture or damage on account of handling, they are kept in a packed condition. It is the petitioner's case that the third respondent, which is an authority under the Standards of Weights and Measures Act, 1976 (hereinafter referred to as ‘the SWM Act’ for brevity) had inspected the premises of one of the agents of the petitioner namely, M/s Soft-Ed Solutions India Private Limited, Koppikar Road, Hubli, on 13-3-2007 and had seized a box containing GSM FWP and had promptly issued a notice regarding registration of a case for violation of the provisions of the Standards of Weights and Measures Act, 1976 and the Standards of Weights and Measures (Packaged Commodities) Rules, 1977 (hereinafter referred to as ‘the Rules’ for brevity), calling upon the said agent to compound the offence, failing which they would initiate proceedings before the Court of the jurisdictional Magistrate. This, according to the petitioner, was possibly on account of the third respondent proceeding under the impression, that the aforesaid device namely, the GSM FWP would meet the definition of a packaged commodity and hence was within the provisions of the Act and the Rules. Thus it is the contention of the petitioner that the issue as to whether such devices, as named above, provided by the telephone service providers for activation of services, would amount to sale or not for purposes of the Sales Tax Act, was raised before a three Judge Bench of the Supreme Court and the Bench having formed an opinion that imposition of Sales Tax for any facilities of telecommunication services is untenable in law, as there is no element of sale, had remanded the matter for a fresh consideration to the jurisdictional Commissioner of Commercial Taxes, who in turn, has held that the element of sale was not involved and that the transfer of such goods would not attract the provisions of the Sales Tax Act. The above said judgment of the Supreme Court was in the case of Bharat Sanchar Nigam Limited and Another v. Union of Inida . W.P Civil 183/2003, Dated 2-3-2006..

It is the petitioner's case that this legal and factual position has been brought to the notice of the third respondent, but he has proceeded and has proposed to initiate criminal prosecution. It is at that stage that the present petition is filed.

This Court had granted an order of stay of further proceedings and the same continues to operate.

3. The Counsel for the petitioner, elaborating on the grounds urged in the petition, would submit that the aforesaid devices though are pre-packed commodities, would not attract the provisions of the SWM Act or the Rules, the relevant provisions which are cited by the third respondent in initiating the proceedings clearly do not cover the same. It is only those packaged commodities which are sought to be sold in a packed form, which are covered under the said provisions. In. this regard, the Counsel would draw attention to Section 39 of the SWM Act and Rule 4, 23(1) and 33 of the Rules, to demonstrate that a plain reading of these provisions does not contemplate a commodity such as the one in the case on hand. He would draw attention to Rule 2(1), which provides that a “pre-packed commodity” means a commodity which is packed in the absence of the purchaser and the phrase — ‘retail dealer’, ‘retail package’ and ‘retail sale’ are defined as per Rule 2(o), (p) and (q) to mean a commodity which is in a packed-form sold to a consumer. It is only in respect of commodities in packed-form which are likely to be sold that are obviously covered under the Act and the Rules. There is no element of sale involved in respect of the devices in the case on hand. These devices are not sold by themselves. It is only to enable the subscriber to access the services which are paid for and provided, that these devices are supplied. They are not sold by themselves. As already stated, the Counsel would emphasize that the devices by themselves, without the provision of services, are not of any commercial value to a purchaser and the ownership in the property is never transferred. And it is an express term of the agreement under which these devices are parted with, that they shall be returned on termination of the contract. The third respondent has completely overlooked this glaring aspect of the matter and has proceeded merely on the assumption that since the devices are in a packed state at the retail service outlets of the petitioner, that they are packed commodities covered under the provisions of the SWM Act and Rules.

4. The respondents are represented by the Government Pleader and Statement of Objections are filed on behalf of the respondents in one of these petitions.

It is contended in the Statement of Objections, which the Government Pleader seeks to reiterate, that Rule 1(3) of the Rules would indicate that the commodities are in a packed form, which are likely to be sold, or even which are likely to be delivered or offered or stored for distribution, would come under the purview of the SWM Act and the Rules. He would insist that anything packed or wrapped and caused to be sold are considered as pre-packed commodities. In the absence of any exemption under the Rules and since admittedly, the said commodities are displayed at a retail outlet, the SWM Act and the Rules would squarely apply notwithstanding any declaration on the package to the effect — “Not for Sale”, “Packing is only for protection”, “Not to be sold alongwith the Package”, “Free Gift Package”, “Displayed only for advertisement” etc., would not exempt the commodities from the rigour of the provisions of the SWM Act and the Rules. Further, importing any pre-packed commodities would require the importer to get himself registered with the Government of India, Directorate of Legal Metrology, New Delhi. It is an admitted fact that the petitioner is not so registered. The petitioner has thus violated Rule 35, which is also punishable under the Act. It is in order to evade customs duty and sales tax, that the petitioner has devised the so-called schemes to camouflage the sale of these devices, by contending that it is the service which is provided and the devices are supplied to enable the subscriber to access the services. On the other hand, it is clear that the cost of the devices is certainly worked into the so-called service charges that are collected. This is apparent from the circumstances that in the event of any theft or accidental physical damage caused to the device, it is not anywhere declared by the petitioner that they would replace the device free of cost, which should be the consequence of the petitioner's contention that at all times the device continues to be the property of the petitioner. It follows that in order to replace the device, the petitioner would certainly impose a price which can be nothing but the sale price of the device and therefore, would have to be indicated as the sale price of the packaged commodity as required under the provisions of the S WM Act and the Rules. This would in any case not affect the transaction or the charges, which the petitioner would pass on to the subscriber.

Further, the Government Pleader would submit that the object of the SWM Act and the Rules is to safeguard the interest of the consumer and this laudable object is defeated if the devious schemes of the petitioner are accepted as being merely for one of services without a sale being involved insofar as the aforesaid devices are concerned. Therefore, the Government Pleader would submit that there is no merit in the writ petitions and they ought to be rejected.

5. By way of reply, the Counsel for the petitioner would emphasize that having regard to the authoritative opinion of the Supreme Court as to the nature of the transaction involved and having expounded that the transaction is one for provision of services and that there is no element of sale involved would no longer render the issue res integra. The extreme example of the device being lost or damaged and the cost of replacement being the retail value of the device, is not the criteria for addressing whether the provisions of the Act and the Rules would apply. There is no circumstances under which the said devices are sold across the counter. The charge, if any, that may be imposed on a subscriber to replace the devices if at all, would be relatable to such services being rendered of procuring and replacing the device and possibly assigning a distinct number of such a replaced device and it cannot be attributed as being the value of the device itself which is provided alongwith the services in the first instance. The belief of the third respondent that these devices carry a price and that it is cleverly worked into the service charges that are paid over time is a mere allegation and in the absence of any adjudication in this regard, there is no justification in the third respondent attributing such devious modus operandi on the part of the petitioner. The service charges attract service tax and the allegation that the petitioner intends to deprive the State of its revenue under other fiscal legislation is therefore not tenable.

6. In the light of the above rival contentions, it is firstly necessary to understand the nature of the transaction involved to examine whether the proceedings sought to be initiated under the SWM Act and Rules, which is sought to be questioned in the present petition is warranted.

The Apex Court in the decision cited above has expressed the nature of the transaction insofar as a contract between a telecom service provider and a subscriber is concerned. The Supreme Court has held as follows:

“…….The contract between the telecom service provider and the subscriber is merely to receive, transmit and deliver messages of the subscriber through a complex system of fibre optics, satellite and cables.

Briefly, the subscriber originates/generates his voice message through the handset. The transmitter in the handset converts the voice into radio waves within the frequency band allotted to the petitioners. The radio waves are transmitted to the switching apparatus in the local exchange and thereafter after verifying the authenticity of the subscriber; the message is transmitted to the telephone exchange of the called party and then to the nearest Base Transceiver Station (BTS). The BTS transmits the signal to the receiver apparatus of the called subscriber, which converts the signals into voice, which the subscriber can hear…..”

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“………the Petitioners carry messages. They are only carriers and have neither property in the message nor effects any transfer to the subscriber. The advancement of technology should be so absorbed in the interpretation that this method of carriage of message should also be understood as carriage of goods and not a transfer of a right to use goods, if any.

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

Clause 9 clearly interdicts the licensee provided that licensee will not assign or transfer his rights in any manner whatsoever under the licence to third party. It is impossible to contend that the right to use goods, assuming without conceding that they are goods, which are essential for the rendition of service can never be a transaction or transfer of right to use goods. Nor can the contract between subscribers and licensee viz., service provider be interpreted as involving transfer of right to use goods….”

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“…….. It is not possible to interpret the contract between the service provider and the subscriber that the consensus was to mutilate the integrity of contract as a transfer of right to use goods and rendering service….”

These observations though made in the context of considering whether the transaction would attract sales tax, it is relevant to consider whether the above said devices in the case on hand are either sold or sought to be sold to a subscriber alongwith the services that are provided. On the fact of it, in terms of the standard form agreement, which a subscriber is required to execute in availing the services provided by the petitioner, there is clearly a term which requires the subscriber to return these devices on termination of the contract. The terms and conditions for providing services as enumerated at Clause-9 of the Terms reads as follows:

“The SIM Card and the Cellular number are and shall always remain the sole property of BCL and shall be returned by the subscriber to BCL upon termination and/or deactivation or temporary suspension of services. Upon termination and/or deactivation or temporary suspension of services the subscriber shall not claim any right or interest to the same.”

This would clearly indicate that there is no transfer of the property in the goods. The contention that the devices always remain as the property of the petitioner would have to be accepted. The third respondent seeking to abide by the tenor of the provisions of the Act and the Rules may have proceeded in the bona-fide belief, that the devices which are displayed in packed form at the retail service centres of the petitioner would squarely be covered on a plain reading of the provisions. As there is no adjudicatory mechanism provided under the Act, it does not afford an opportunity to entities, such as the petitioner, to demonstrate that a particular commodity would not fall under the provisions of the Act or the Rules.

The contention on behalf of the State that the devices do carry a price and the illustration by reference to a hypothetical situation, if the device is lost or damaged, and when it is required to be replaced, the amount that may be charged by the petitioner in respect of the same would be the price and this ought to be indicated, as the commodity is in a packaged form and displayed in retail outlets of the petitioner, is not a tenable ground which would attract the provisions of the SWM Act and the Rules. The emphasis under the provisions of the Act and the Rules is in respect of commodities which are intended for sale, by themselves. Though the commodities in question are displayed in packed form they are not meant for sale by themselves. It is always coupled with or incidental to the subscriber availing the services provided by the petitioner. Further, as there is clearly an agreement by the subscriber to surrender the devices on termination of the contract, it cannot be said that there is any element of sale involved. The suggestion on behalf of the respondents that the petitioner had devised a way to include the cost of the device into the service charges that are imposed, cannot be accepted as a finding of fact without there being an adjudication in this regard. Hence, on a prima facie test, it ought to be held that the proceedings sought to be initiated by the third respondent in the case on hand is misplaced.

Accordingly, these petitions are allowed. Annexure-B in Writ Petition No. 11486/2007 and Annexure-E in Writ Petition No. 1744/2008 are hereby quashed.