Can there be a liability to pay both VAT and Service Tax on the same activity? While deciding a VAT case, the Karnataka High Court held that the assessee was liable to pay VAT on the whole value in spite of the fact that they were paying Service Tax.
The appellant Bharti Airtel Ltd has challenged the order dated: 16.03.2007 passed by the Single Judge of this Court declining to interfere with and quash the order of Re-assessment dated 12.01.2007 passed by the Deputy Commissioner, Commercial Tax, - "Assessing Authority" and consequent 12 notices of demand issued by him for the months of April 2005 to March 2006 demanding the tax from the appellant – company. The Single Judge declined to interfere with and quash the said order and notices on the ground that the Appellant did not avail the statutory remedy provided under the Karnataka Value Added Tax Act, 2003 (" KVAT Act”). Therefore, the appellant has also challenged the legality and correctness of the said order of re-assessment.
The Appellant Company has established telecom infrastructure for providing 'broadband connectivity' by laying clown about 35000 kms optic fibre cables across the country five feet deep in the ground. These optic fibre cables have enormous data carrying capacity at very high speed at which the light travels without any interference. The Appellant provides service of telecom connectivity to its subscribers from one 'point of presence' (POP) to one or more “points of presence” through a complex network of copper cables as well as optic fibre cables. This service in commercial parlance is called as “leased lines" whereby the appellant allots to a particular subscriber a particular 'bandwidth'. A ' bandwidth' means, the rate at which data is transferred across a transmission medium and is measured in units of 'Kilobits per second' (Kbps) / 'Megabits per second ' (Mbps). Each subscriber would be provided with a different bandwidth depending upon the individual needs and appellant would enter into a 'Service Level Agreement' (SLA) with all its subscribers.
Once a particular bandwidth is allotted to a particular subscriber, the latter will have the freedom to transmit any amount of data throughout the period of subscription from one end to another and for this, the appellant charges the subscriber a fixed sum for the subscription period. Since the Appellant Company does not affect any sale of goods, it would not be required to pay any tax under KVAT Act. Therefore, it has been submitting monthly returns showing taxable turnover as "Nil".
The Commercial Taxes Department issued 12 Notices under Section 39 of the KVAT Act proposing to reject the Forms VAT-100 submitted by the Appellant and to conclude re-assessment, by adding to the turnover, the amounts received by the appellant towards leasing of broadbands by treating the same as ' transfer of right to use goods ', on the ground that the appellant had leased the physical lines of optic fiber to its various subscribers. The Assessing Authority passed the impugned order of re-assessment and thereby confirmed the entire demand proposed in the said notices and imposed penalties and also levied interest on the tax said to be payable and due by the appellant.
Though the appellant had alternative remedy by way of appeal under the provisions of KVAT Act, it took the stand that the same could not be efficacious one inasmuch as for availing the said remedy of appeal, the appellant was to make deposit of huge amount of money (more than Rs. 12 crores). Besides this, the impugned order of re-assessment has been passed by the Assessing Authority in gross violation of the fundamental rights of the appellant under Articles 14 and 19(g) of Constitution of India. The issue 'whether the action of the third respondent in levying the sales tax despite the appellant company being assessed to the Service Tax under the provisions of the Finance Act, 1994 is tenable in law has to be decided by the High Court but not by the Appellate Authority under KVAT Act and therefore, the alternative remedy available to the appellant under KVAT Act could not be efficacious one.
The points that arise for our determination in this appeal are:
1) Whether the learned Single Judge is justified in dismissing the WP No. 1537/07, filed by the Appellant -Assessee, declining to quash the order of re-assessment passed by the 3rd respondent - Assessing Authority and consequent 12 notices issued by him demanding from the appellant - assessee the tax quantified thereunder, on the ground that the Appellant - Assessee did not avail the statutory remedy of appeal provided under Karnataka Value Added Tax Act, 2003?
2) Whether the 3rd respondent - Assessing Authority was justified in passing the impugned order dated 12.01.2007 making re-assessment of the tax payable by the Appellant - Assessee - Company on the ground that the broadband connectivity provided by the Appellant to its subscribers amounts to " sale of light energy " taxable under section 3 of the Karnataka Value Added Tax Act, 2003?
3) Whether the Government of Karnataka has authority under the Constitution of India to levy tax on the Appellant -Company under the provisions of KVAT Act in respect of its transaction of providing broadband connectivity to its subscribers, for the reason that ' Service Tax ' has been levied on it by the Union Government under the provisions of 'Finance Act 1994 ' treating the said transaction as ' Service '?
On the First, the High Court agreed with the counsel for the appellant-assessee that the question whether the transactions of the appellant company with its subscribers could only be service for which it is liable to be taxed only under the provisions of Finance Act, 1994 or it involved the element of sale of goods making it liable to be taxed under the provisions of KVAT Act and whether the appellant company could be taxed under both the said provisions, could not be decided by the Appellate Authority under the KVAT Act. Therefore, the High Court held that the Appellant - Assessee - company could maintain its said writ petition and as such the Single Judge is not justified in dismissing the same only on the ground that the appellant-assessee did not avail alternative statutory remedy available to it under the said Act.
Hence point No.1 is answered in the ' Negative ' and in favour of the Appellant-Assessee.
Point Nos.2 and 3 : For recording its 'findings and reasons' on these two points the High Court had to consider and answer the following questions namely:
1. Whether the ' tight energy ' required for transmitting the data of the subscribers of the Appellant-Assessee-Company from one point to another through the Optic Fibre Cable network laid by the Appellant-Company is artificially created by it ?
2. Whether such 'artificially created light energy ' is capable of being held as 'goods’?
3. Whether there is ' sale of such artificially created light energy ' by the Appellant-Assessee-Company to its subscribers in its activity of transmitting their data from one point to another through its Optical Fibre Cable Network so as to attract the provisions of KVAT Act 2003?
4. If the element of 'service' and also the element of, 'sale of artificially created light energy' are to be found in the activity of the appellant - assessee company in providing ' broadband connectivity' to its customers, whether the Karnataka State Government would have authority to levy tax on the said Sale despite the appellant - assessee being assessed to ' service tax' by the Central Government under Finance Act, 1994?
The High Court observed,
The transmission of data of its subscribers is carried out by the appellant - assessee company by artificially creating the light energy and making it to carry the data by travelling through the core of optic fibre cables laid by it across the country about 5 feet deep into the ground. Therefore, the Assessing Authority has rightly observed in his impugned order, that " light energy " is ' artificially created ' by the assessee company within its net work.
So the High Court answered the question No.(1) formulated namely, " whether the light energy required for transmitting the data of the subscribers of the appellant -assessee company from one point to another through Optic Cable network laid by the appellant Company is artificially created by it " in the Affirmative' holding that the said energy is created by the appellant -assessee company.
The second question is: "Whether such artificially created light energy is capable of being held as goods"
From the opinions of the experts in the field which were obtained by the Assessing Authority and also the assessee-company, the genuineness of which is not in dispute, it is clear that the ‘’electro magnetic waves' used in the operation of mobile phones and the ‘artificially created light energy' though it is ‘electro magnetic waves of high frequency', both are distinct from each other having different characteristics and being used for different purposes. It is further clear that the artificially created light energy in the instance case is capable of being possessed, transmitted, delivered and used, and, to some extent, stored.
Therefore, even applying the ratio in BSNL Vs. Union of India on which strong reliance is by appellant - assessee Company, to the facts of the present case, and also following the relevant observations of supreme Court in all its earlier decisions discussed and which have been considered by Supreme Court in BSNL's case, the High Court held that the 'artificially created electrical light energy' which is used for transmission of data of the subscribers of the appellant - assessee - company through its OFC Network is "goods" within the meaning of Article 366 (12) of the Constitution of India; Section 2(15) of the KVAT Act 2003 and also Section 2(7) of Sale of Goods Act 1930.
Hence the High Court answered the second question formulated namely "whether artificially created light energy is capable of being held as goods" in the 'affirmative' holding it as "goods".
Whether there is sale of artificially created light energy' (ACLE) by the appellant assessee company to its subscribers in its activity of transmitting their data through its OFC Network so as to attract the provisions of KVAT Act 2003 and whether Karnataka State Government has authority to levy VAT on the activity of the appellant company of transmitting the data of its subscribers through its OFC Network despite the appellant being assessed to service tax 'by the Central Government under Finance Act, 1994?"
Following the observations of Supreme Court, the High Court held that even if the activities of the appellant company are comprehensively termed as ‘service' under the ‘service Level Agreement' entered into by the appellant company with its subscribers, they answer the description of ‘sale' within the meaning of section 2(29(d) of KVAT Act, and therefore they are to be regarded as ‘sale' for the purpose of the said statue despite the said activities are held as ‘service' for the purpose of Finance Act 1994.
Hence, it was held that the said activity of the appellant company certainly involves the element of sale of ‘artificially created light energy.
The High Court further held that in the present composite transaction between the appellant Company and its subscribers in providing broad band connectivity to the subscribers, the two elements of service and sale cannot be split.
The High Court held that since elements of service and sale in the instant transaction cannot be separated from each other, as rightly held by the Assessing Authority in the impugned order of reassessment, the entire proceeds received by the appellant Company from its subscribers as ‘Service rentals' shall have to be brought under tax under the provisions of KVAT Act treating the entire transaction of the appellant Company in providing the broad band connectivity to its subscribers as sale of artificially created light energy.
The question Nos. 3 and 4 were answered in the ‘Affirmative' holding that ‘there is sale of artificially created light energy' by the appellant company to its subscribers in its activity of transmitting their data through the OFCs network so as to attract the provisions of KVAT Act 2003 and that the Government of Karnataka has authority to levy VAT on the entire proceeds collected by it as “lease rentals” from its subscribers despite the Appellant Assessee Company being assessed to ‘service tax' by the Central Government under the Finance Act 1994.
To sum up the High Court held,
1. the activity of providing Broad Band Connectivity by the appellant company to its subscribers amounts to ‘sale of light energy' taxable under Section 3 of the KVAT Act 2003,
2. the Government of Karnataka is competent to levy tax on the said sale under the provisions of the KVAT Act, 2003 on the entire proceeds collected by it from its subscribers as “lease rentals” despite the appellant company being assessed to service tax on the said activity by the Union Government under the provisions of Finance Act, 1994, treating it as ‘service'.
Bharti Airtel has appealed to the Supreme Court and the Court has ordered, “List on 02.03.2009. Status quo, as on today, shall be maintained till then
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